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. ROSWELL C. McCREA 

GENERAL EDITOR 



BUSINESS OWNERSHIP 
ORGANIZATION 



BY 

ARCHIBALD H. STOCKDER, M.A. 

COLUMBIA UNIVERSITY 




NEW YORK 

HENRY HOLT AND COMPANY 

1922 



^■p^ 



6^ 



Copyright, 1922, 

BY 

HENRY HOLT AND COMPANY 



PRINTED IN U. S. A. 



g)C!.A6618a4 



PREFACE 

The subject of business organization has usually been 
approached from one of two points of view. The first of 
these approaches is from the standpoint of the principles 
and problems involved in building up the legal form of or- 
ganization under which the business is to be owned, and 
that bear upon the relations of the entrepreneur, the cred- 
itor and third parties to one another and to the business 
establishment itself. The second strikes the problem from 
the angle of the technique involved in making those internal 
arrangements that are necessary or desirable to secure effi- 
ciency in the administration and operation of the enter- 
prise. For the sake of brevity, we shall call the subject- 
matter of the first ownership organization and of the second 
administrative organization. It is the former with which 
this work has to do. 

Most writers on the subject of ownership organization in 
business have been lawyers, a circumstance which has so 
influenced their work that they have almost invariably 
Hmited their writings to a consideration of the legal aspects 
of parts of this broad subject. Thus we have numerous 
treatises on the law of partnership, on corporations, on 
trusts, etc., that are intended to appeal primarily to the 
student of law. As a result they fail to interest the student 
of applied economics, for they lack that broadness of view 
that is so essential to a full understanding of the intricacies 
of organization of the present system of business ownership. 

The legal institutions that form the basis of the owner- 
ship forms of today have very largely developed from social 
custom, in consequence of which they differ somewhat in 
principle^ form and application from country to country. 



vi PREFACE 

They were nearly all in existence long before the industrial 
revolution ushered in the modern era of big business enter- 
prise. They had to be adapted to meet those new condi- 
tions that were brought about by large scale production, a 
widened concept of business capital and the economic forces 
driving competing business establishments into monop- 
olistic and semi-monopolistic combines. These powerful 
influences have played a far more important part in shaping 
the modern forms of ownership organization than can be 
ascribed to legal principles and differences. 

A study of the business ownership organizations of today 
is, therefore, something more than a mere analysis of legal 
forms. It is the application of these forms to business 
uses in the light of the modern industrial system. This is 
the point of view that has been uppermost in my mind 
during the preparation of this brief exposition; and it is my 
hope that, through this work, the general public, as well 
as the student of applied economics will be enabled to ob- 
tain a clearer picture and a fuller understanding of the 
ownership of business than has heretofore been possible. 

A. H. S. 



CONTENTS 

PAGE 

PART I. ECONOMIC AND LEGAL FUNDAMENTALS 

Chapter I. The Concept of Capital as the Foundation of 

Ownership Organization in Business 3 

The Business Establishment Defined 3 

The Private versus the PubHc Entrepreneur 3 

Function and Classification of Business Establishments 4 

Social Custom, Business Enterprise and Economic Develop- 
ment 5 

The Concept of Capital and its Influence upon the Ownership 

Organization 8 

1. The stage of goods as capital 9 

2. The money capital stage 12 

3. The securities capital stage 16 

Influence of Large-Scale Production and Competition on Or- 
ganization 17 

Chapter II. The Legal Foundation of Ownership Organi- 
zation IN Business 18 

The Legal Foundation jg 

Federal Laws and Entrepreneurial Organization 20 

State Laws and Entrepreneurial Organization 21 

Domestic and Foreign Organizations 22 

Greater Freedom of Common Law Organizations 22 

Comparative Qualities of Ownership Organizations 22 

(a) Method of formation 23 

(b) Liabihty of the entrepreneur 23 

(c) Ease with which the required capital m.ay be 

procured 24 

(d) DurabiHty and stability [[][ 25 

(e) Ease of direction ]] 28 

(/) Onerous obhgations 31 

(g) Legal status 32 

(h) Sphere of activity 33 

Classification of Ownership Organizations 34 

vii 



viii CONTENTS 

PAGE 

PART 11. PERSONAL OWNERSHIP ORGANIZATIONS 

Chapter III. The Individual Proprietorship and the 

Participation Association 39 

Personal Ownership Types 39 

The Individual Proprietorship 39 

The Participation Association 45 

Chapter IV. The Partnership 52 

Definition 52 

Formation — The Contract 53 

Legal Nature and Legal Actions 56 

Rights and Obligations of Partners toward One Another .... 56 

Obligations of Partners toward Third Parties 61 

Classification of Partners 63 

Sphere of Activity , 64 

Dissolution and Termination 64 

Classification and Types of Partnerships 65 

1. Ordinary partnerships 67 

2. Limited partnerships 67 

3. Partnership associations 67 

4. Joint stock companies 68 

5. Mining partnerships 68 

6. Sub-partnerships 68 

7. Joint adventures 69 

8. Underwriting sj^ndicates 69 

Extent of Use 70 

Limitation of the Partnership 71 



PART III. SECURITIES-ISSUING ORGANIZATIONS 

Chapter V. The Nature of Securities 77 

Theory of Impersonal Organization 77 

Securities are a Class of Commercial Paper 80 

Money paper 80 

Commodity paper 81 

Investment paper 81 

Ownership paper 83 

Creditor paper 84 

Non-securities 84 

Securities 85 

Extent of Use of Securities 86 

Transferability of Securities 92 

The Principle of " Securitization " of Ownership 97 

Types of Securities-Issuing Organizations 98 



CONTENTS ix 

PAGE 

Chapter VI. The Joint Stock Company 100 

Definition 100 

Formation 100 

Capitalization and Stock 102 

Internal Organization 103 

External Relations 105 

Permanence and Stability 106 

Value and Use 107 

Chapter VII. The Corporation — Its Nature and Es- 
sential Characteristics 109 

Definition 110 

Legal Entity Ill 

Creation Ill 

Sphere of Activity 113 

Ownership and Liability 114 

Direction and Control 115 

Permanence and Stability 116 

Onerous Obligations 117 

Classification of Corporations 119 

Advantages and Disadvantages 120 

Chapter VIIL Corporate Securities and Capitalization.. 124 

The Corporate Securities 124 

Capital stock 124 

Full-paid and part-paid stock 126 

Treasury stock 127 

Stock classification .... 128 

Common Stock 128 

Preferred Stock 131 

Bonds and Corporate Notes 135 

Classes of Securities Ordinarily Used 142 

Capitalization 143 

Chapter IX. The Corporation — Formation, Charter 

AND By-Laws 150 

General and Special Corporation Laws 150 

Formation of Business Corporations 151 

Who may incorporate 152 

Pre-incorporation agreement 152 

Application for a charter 152 

Certification and recording 154 

Organization meetings 155 

Reversed procedure 156 

"Cut and dried" procedure 157 



X CONTENTS 

PAGE 

The Charter 157 

Main features and provisions 158 

The By-Laws 163 

Purpose and adoption of 164 

Contents 165 

Chapter X. The Corporation — Its Operating Mechanism 166 

The Stockholders 167 

Powers of stockholders as a body 168 

Classification and qualification 169 

Stockholders of record 170 

Transfer agent and registrar 170 

Stockholders' meetings 171 

Stockholders' voting trusts 175 

Protection of minority stockholders 176 

The Board of Directors 177 

Functions of the board of directors 177 

Election, term of office, etc 178 

Number and quaUfications of directors 179 

Compensation 181 

Individual director's relation to the corporation 181 

Powers of the board of directors 182 

Meetings 188 

The Corporate Officers 189 

General executive officers: President and vice-presidents 190 

Treasurer 191 

Secretary 192 

Auditor 195 

Counsel 195 

Chapter XI. Use of the Business Corporation 197 

Types of Corporations 201 

The Securities-Holding Corporation 202 

Apphcations of the Securities-Holding Principle 204 

Subdivision of legal title 205 

Substitution of securities 208 

Consolidation of corporations 209 

Chapter XII. The Business Trust 213 

General 213 

Definition 213 

Formation 214 

The Trustees 215 

Trustees as managers 215 

Appointment, removal, successors 216 

Liability of trustees 217 

Right to sue and be sued 219 



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CONTENTS 



XI 



PAGE 

Relation to court of equity 220 

Compensation of trustees 220 

The Beneficiaries 220 

Rights and powers of beneficiaries 221 

Liabihty 223 

Transferabihty of interest 223 

The Trust Capital 224 

Rights of Creditors 229 

Other Trust Features: Duration, scope of activity, etc 227 

Business Uses and Types 229 

The trust agreement 229 

Types 232 



PART IV. COMBINATIONS OF OWNERSHIP 
ORGANIZATIONS IN BUSINESS 

Chapter XIII. Business Combination — Its Causes and 

Forms 237 

Causes of Combination and Concentration 238 

Direction in which Combination may take Place 244 

Classification of Combination Organizations 253 

Chapter XIV. Combinations Ordinarily not Based on 

Ownership Rights 256 

A. Associations as Business Combinations 256 

General commercial associations 258 

Trade and industrial associations 259 

Special purpose associations 259 

Tendency to federate for purpose of control 261 

B. Factors' Agreements as Instruments of Combination .... 262 

Conditional requirements 262 

Exclusive arrangement 263 

Preferential arrangement 264 

C. Federations 265 

The American pools 265 

1. Percentage division of business 266 

2. Curtailment of output 268 

3. Territorial division of market 269 

4. CentraHzed or joint sales plan 270 

5. Centrahzed purchase of total supply for resale .... 272 

6. Price fixing pools 273 

7. Patent pools 276 

8. Open price pools 277 

The Kartell or Syndicate 278 

Types of kartells 280 



xii CONTENTS 

PAGE 

Integration by kartells 284 

Distribution of kartell organizations 285 

Effect of Federation Organizations upon Industry 286 

Chapter XV. Securities-Substitution — Investment Com- 
panies 292 

Participation as an Application of the Principle of Substi- 
tution 292 

Kinds of participation 293 

Investment Companies 296 

English investment companies 296 

American investment companies 299 

Investment companies in other countries 301 

Criticism 302 

Chapter XVI. Principles of Control 303 

The instrumentalities of control 303 

Contract control 305 

Participation control 307 

Instruments of participation control 308 

Modes of participation control 310 

Chapter XVII. Control Companies 318 

A. Trusts as Control Companies 318 

The Standard Oil Trust of 1882 319 

The Whiskey Trust 321 

Legal status 321 

Present-day holding trusts 322 

B. Holding Corporations as Control Companies 323 

The Control Corporation among the American railroads 327 

The Harriman System 328 

The Queen and Crescent Route 333 

Control corporations among public utilities : 335 

The American Telephone and Telegraph Company . . 335 

Control corporations among industrials : 337 

The Standard Oil Company of NeAv Jersey 339 

The United States Steel Corporation 341 

The Control company in ocean transportation : 345 

The International Mercantile Marine Company 345 

Mercantile control companies : 347 

The control company in other countries 348 

Advantages and weaknesses of the control company. . 349 

Chapter XVIII. Finance and Assumption Companies 356 

Promotion 356 

What Constitutes Financing a Company 357 



CONTENTS xiii 

PAGE 

Greneral Finance and Assumption Companies 358 

Special Finance and Assumption Companies 359 

American finance and assumption companies 361 

Finance and assumption companies in Germany 368 

Finance and assumption companies in other countries . . 376 

Evaluation of Finance and Assumption Companies 378 

Chapter XIX. The Growth and Development of a 
Monopolistic Control Company — The American 

Tobacco Company 383 

The tobacco industry prior to 1890 384 

Amalgamation of five cigarette manufacturing concerns into 

the American Tobacco Company (1890) 385 

Enters the plug tobacco business (Jan., 1891) 386 

Enters the cigar and cheroot business (April, 1891) 386 

Enters the smoking tobacco and snuff business (April, 1891) 386 
The "plug tobacco war " and the formation of the Continen- 
tal Tobacco Company, (1898) 388 

Transfer of the plug business to the Continental Tob. Co. . . 389 
The Continental Tob. Co. acquires control over the P. Loril- 

lardCo 389 

The American Tobacco Company increases its capitalization 390 

Power and control of the American Tob. Co. in 1898 390 

The second period of expansion begins, (1898) 390 

More competing concerns are acquired 390 

New controlled companies are organized : . . . 392 

The snuff business is transferred to the Am. Snuff Co 392 

Enters the tinfoil business, (1899) 394 

Manufacturers and dealers in cigars are consolidated and the 

American Cigar Company is formed, (1901) 394 

Secures control of the manufacture of licorice, (1902) 395 

The Am. Stogie Co. is formed to take over the stogie and 

tobie business 396 

Enters the retail tobacco business by acquiring the United 

Cigar Stores Company 396 

Enters the English market, (1901) 397 

Enters into agreements with Enghsh companies to divide 
the world's market. — The British-American Tobacco 

Company is formed, (1902) 397 

The Consolidated Tobacco Company is organized to cen- 

trahze control, (1901) 398 

The Consolidated, the Continental and The Old American 
Tobacco Co. are merged into the new American 

Tobacco Co., (1904) 399 

The Tobacco Trust in 1910, (chart) 401 

Why the Supreme Court ordered the dissolution of the to- 
bacco combine 402 



xiv CONTENTS 

PAGE 

PART V. ABUSES OF OWNERSHIP ORGANIZATION 
AND ATTEMPTS TO REMEDY THEM 

Chapter XX. Abuses and Weaknesses of the American 

System 407 

The Acts and Abuses Leading to Criticism 408 

1. Administrative abuses 408 

2. Abuses arising out of methods of promoting and fi- 

nancing companies 411 

(a) Unwise promotion 412 

(6) Over-CapitaUzation 413 

(c) Influence of the life insurance companies 414 

(d) Supporting the market 414 

(e) Profits of underwriting 415 

(f) Promoters' profits 416 

3. Abuses in Financial Management 416 

(a) Financial readjustments 417 

(6) Conversions 419 

(c) Reorganizations 420 

(d) Dividend policies 421 

4. Speculation 423 

5. Unfair competition 427 

(a) Local price cutting 428 

(6) Bogus competing concerns 428 

(c) Fighting instruments 428 

(d) Exclusive and restraining contracts 429 

(e) Rebates and preferential contracts 429 

(J) Exclusive control of machinery used in manu- 
facturing processes 429 

(g) Blacklisting and boycotting 429 

(h) Intimidation and interference 429 

(i) Manipulation of markets 430 

Monopoly and Combinations in Restraint of Trade 430 



Chapter XXL Present and Proposed Regulation and 

Reform 432 

State Regulation and Control 432 

Corporate control 432 

Responsible management 433 

Capitalization 433 

Systematic reform 434 

The "Seven Sisters " of New Jersey 435 

"Blue Sky " laws : 437 

Uniform Stock Transfer Act 439 



CONTENTS XV 

PAGE 

Federal Regulation 439 

Legislation regulating transportation companies 439 

The Interstate Commerce Commission Act of 1887 . . 440 

The Elkins Act of 1903 440 

The Hepburn Amendment of 1906 440 

The Transportation Act of 1920 440 

Federal anti-trust legislation 442 

The Sherman Anti-Trust Law of 1890 442 

The Anti-Trust Amendments of the Wilson Tariff Act 

of 1894 443 

The Federal Trade Commission Act of 1914 444 

The Clayton Act of 1914 446 

The Webb Act of 1918 447 

The War Finance Corporation Act of 1918 448 

Our Future PoUcy 449 

What should be done 450 

How it should be done 453 



PART VI. SUPPLEMENTARY FORMS AND DOCUMENTS 

A. Forms Pertaining to the Partnership 461 

Form 1. Partnership Agreement 461 

Form 2. Notice of Dissolution of Partnership 466 

Form 3. Notice of a Partner's Withdrawal 466 

B. Forms Pertaining to Securities-Issuing Organizations 467 

Form 4. Articles of the Pierce-Fordyce Oil Association 

(Joint Stock) 467 

The Corporation 473 

Form 5. General Contract to form a Corporation 473 

Option Agreements 475 

Form 6. Option on Business and Property 476 

Form 7. Option on Stock 478 

Subscription Lists 478 

Form 8. Simple Subscription List 478 

Form 9. Trustees' Subscription List 479 

Certificate of Incorporation 479 

Form 10. Charter of the Fit- Well Clothing Corporation 480 

Object or Purpose Clauses 482 

Form 11. Automobiles 483 

Form 12. Department Store 483 

Form 13. Hardware Manufacture and Sale 483 

Form 14. Grocery 484 

Form 15. Mining 484 

Form 16. Investment Brokers 485 



xvi CONTENTS 

PAGE 

Special Stock Clauses 485 

Form 17. Capital Stock of No Par Value 485 

Form 18. Preferred Stock of No Par Value 486 

Form 19. Non-Cumulative Preferred Stock 486 

Form 20. Representative Types of Preferred Stock .... 486 

Forms of Stock Certificates 488 

Form 21. Common Stock Certificate 489 

Form 22. Certificate of Preferred Stock 491 

Form 23. Certificate of Common Stock giving 1 erms of 

Preferred Issue 493 

Form 24. Certificate of Common Stock without Par 

Value 494 

Lost Certificates 495 

Form 25. Notice of Stoppage of Transfer 495 

Form 26. Bond of Indemnity for Re-Issue of Lost 

Certificate 495 

Bond Forms 496 

Form 27. Mortgage to secure Bonds, Short Form 497 

Form 28. Simple Form of Bond Certificate 501 

Forms Pertaining to Administrative Organization 

Form 29. By-Laws of the United States Steel Cor- 
poration 503 

Voting Trust Forms 518 

Form 30. Voting Trust Agreement 519 

Form 31. Voting Trustees' Certificate 521 

Forms Relating to Stockholders' and Directors' Meetings 522 
Form 32. Call and Waiver to bring together First 

Meeting of Stockholders 523 

Form 33. Notice of Regular or Annual Meeting of 

^Stockholders 524 

Form 34. President's Call for Special Meeting of 

Stockholders 525 

Form 35. Stockholders' Request for Special Meeting. . . 526 
Form 36. Special Meeting of Stockholders by Call and 

Waiver 527 

Form 37. Directors' Resolution for Special Meeting 527 

Proxies 528 

Form 38. General Unlimited Proxy 528 

Form 39. Revocation of Proxy 528 

Election Forms 529 

Form 40. Oath of Inspectors of Election 529 

Form 41. Inspectors' Certificate of Election 530 

Form 42. Notice of Election 530 

Form 43. Oath of Officers 531 

Bond of Treasurer 532 

Form 44. Treasurer 's Bond of Indemnity 532 



CONTENTS xvii 

PAGE 

Dividend and Financial Forms 533 

Form 45. Directors' Resolution Declaring Dividend . . . 533 
Form 46. Resolution Declaring Dividend on Preferred 

Stock only 533 

Form 47. Treasurer's Notice of Dividend 534 

Form 48. Notice of Property Dividend 534 

Form 49. Short Financial Statement of a Corporation . 535 

Corporate Signatures 536 

Form 50. Official Signatures 536 

Form 51. Corporate Signature — Informal 537 

Form 52. Corporate Signature — Formal 537 

Sale of Assets and Dissolution 537 

Form 53. Stockholders' Resolution of Entire Assets . . . 538 

Form 54. Directors' Resolution of Entire Assets 538 

Form 55. Notice of Dissolution 539 

Trust Agreement of a Lawful Business Trust 

Form 56. Agreement and Declaration of Trust of the 

Massachusetts Gas Companies 540 

C. Forms Pertaining to Combination Organizations 555 

Form 57. Factor's Agreement of the National Wall 

Paper Co 555 

Form 5S. Typical Pool Agreement — The Steel Rail 

Pool of 1887 557 

Form 59. The Standard Oil Trust Agreement of 1882. . 560 

Form 60. Directors' Resolution for Consolidation 571 

Form 61. Stockholders' Resolution Authorizing Con- 

soHdation 573 

Form 62. Charter of an Industrial Control Company — 

The United States Steel Corporation 573 

Form 63. Charter of a Securities Holding Company — 

The Northern Securities Company 581 

D. Governmental Regulation 586 

Form 64. The Sherman Anti-Trust Act of 1890 586 

Form 65. Anti-Trust Act of the State of Kansas, 1889. 588 
Form 66. Blue Skv Law of the State of Maryland of 

1920 589 



CHARTS AND ILLUSTRATIONS 

PAGE 

1. Distribution of Stockholders of a Large Corporation 168 

2. Direction of Combination in Industry 245 

3. Pyramided Control 313 

4. Diagram Illustrating the Formation of the Standard Oil 

Trust of 1882 319 

5. Chart Showing Types of Intercorporate Control 325 

6. Railroad Companies of the Harriman System in 1911 331 

7. Intercorporate Relations of the Queen and Crescent Route 

in 1906 334 

8. A Pubhc Utihty Control Company 337 

9. An Industrial Control Company 344 

10. A Marine Transportation Control Company 346 

11. Assumption and Finance Companies Subsidiary to the 

General Electric Company 365 

12. Assumption and Finance Companies of the Lenz Group 

of Germany 375 

13. The Tobacco Trust in 1910 401 

14. Chart Showing the Close Interrelation between the Rail- 

road, Railroad Equipment and Financial Companies of 

the United States in 1920 Op. 417 



XIX 



PART I 
ECONOMIC AND LEGAL FUNDAMENTALS 



CHAPTER I 

THE CONCEPT OF CAPITAL AS THE FOUNDATION OF 
OWNERSHIP ORGANIZATION IN BUSINESS 

The Business Establishment Defined. — When we seek 
to secure profits through some organized activity, we have 
a business undertaking or establishment. It may be de- 
fined as a complex of labor and capital brought together 
and directed by an entrepreneur for the purpose of profit. 
Labor, under this definition, includes all human effort, 
whether mental or physical, directed toward the prosecu- 
tion of the enterprise. Capital includes all money and 
securities, natural resources and products, other than 
labor, that are used in the business. The head of the 
enterprise is called the entrepreneur by economists. He is 
the one who, besides risking his capital, or command over 
capital, in the venture assumes the final responsibility for 
its management and direction. However, under present- 
day conditions, business is in large part conducted by 
groups of individuals combined into an organization, such 
as a corporation, a partnership, a joint stock company or 
some other form. These organizations may therefore 
properly be considered entrepreneurial or ownership or- 
ganizations. It is of such organizations that this work 
treats. 

The Private versus the Public Entrepreneur. — While 
the entrepreneur is ordinarily a private person or an asso- 
ciation of persons, this is not always the case. A munic- 
ipal, state or national government may become an entre- 
preneur by going into business. European governments 

3 



4 ECONOMIC AND LEGAL FUNDAMENTALS 

have frequently done this, but in the United States there 
has been a marked antipathy toward this. Nevertheless, 
even in this county, many municipalities own and operate 
gas plants, electric plants, street railway systems and other 
enterprises. And during the recent war the national govern- 
ment went into shipbuilding and the manufacture of muni- 
tions on an extensive scale. But a distinction must be 
made between the government as an entrepreneur and as 
an operator. The act of the government in taking over 
the railways, the telegraphs and the telephones and other 
national equipment, and operating them did not make the 
government the real entrepreneur for it did not assume the 
full ownership responsibility. 

The Function and Classification of Business Establish- 
ments. — In a broad sense, the function of the business 
establishment is the production of economic goods which 
may be used, directly or indirectly, to satisfy human wants. 
It is ordinarily conceived to include the production, or the 
purchase and sale of commodities or both, that is to say, 
manufacture and trade. The work of assembling, trans- 
porting, storing, grading, assumption of risk and financing 
is merely incidental to the chief function, but even these 
services are the bases for a vast number of business enter- 
prises. Others, again, render different services, such as 
advertising, the collection and dissemination of statistical 
data, the communication of ideas. In fact it is almost im- 
possible to enumerate the vast number of different kinds of 
business undertakings that are to be found in a modern in- 
dustrial country. However, for the purpose of convenience 
they may readily be classified under a few suggestive heads. 
The following classification is one that is usually employed 
in government publications. 

1. Agriculture, animal husbandry and fisheries, having 
to do with the growing, raising and direct appropria- 



THE CONCEPT OF CAPITAL 5 

tion of vegetable and animal products for human con- 
sumption. 

2. Mining and quarrying, or the original recovery of 
the useful mineral products from the earth. 

3. Manufacturing, the process whereby the raw prod- 
ucts of the first two groups are transformed into 
consumable products. 

4. Construction, the work of creating in final form the 
more or less permanent equipment of a country such as, 
buildings, canals, railways, docks, bridges, industrial 
plants, etc. 

5. Transportation and other public utilities, which 
include the operation of water, gas, and electric works, 
railroads, telephone and telegraph lines, etc. 

6. Trade, comprising the purchase for sale of goods, 
wares and merchandise by retailers, wholesalers, com- 
mission men, brokers, factors, etc. 

7. Personal service including the professions, amuse- 
ments, domestic services, etc. 

8. Finance, hanking and insurance and similar under- 
takings that are of*a fiduciary character. 

Social Custom, Business Enterprise and Economic 
Development. — The form of the business unit, the method 
by which it conducts its operations, the privileges that it en- 
joys, as well as the limitations and restrictions placed upon 
it are deep rooted in the social and economic structure. 
Consequently any changes in social concepts and customs 
or in economic practices are bound, in the course of time, 
to bring about sympathetic changes in the business unit. 
Social and economic transitions ordinarily take place 
gradually; but at times, as the result of wars or other unan- 
ticipated catastrophes, they may be extremely rapid. Thus 
we find the hoary institutions of private property and in- 
heritance, which are the foundation stones of modern busi- 



6 ECONOMIC AND LEGAL FUNDAMENTALS 

ness organization, gradually losing their dignity as rights 
and assuming the plainer garb of privileges. For the 
" right '^ of inheritance is now limited by heavy inherit- 
ance taxes, while the '' right " of private property is 
subject to eminent domain, and in some European coun- 
tries it is being threatened with the imposition of so-called 
capital levies which would appropriate a large share of 
private wealth to defray the obligations of governments. 
Indeed, the complete abolition of these two institutions has 
been strongly urged by the Marxian Socialists, and the 
Bolsheviks and others. This simply illustrates a change 
in social concepts. It cannot be denied, that the complete 
abolition, either of one or of both of these institutions, 
would have a very marked and far-reaching effect upon the 
form of the business unit, in that it would take business 
completely out of the hands of the private entrepreneur. 
We have but to bear in mind the demands made upon the 
governments of the United States and of the United King- 
dom for the nationalization of railways, coal mines, and 
other fundamental industries, to realize how close to our 
daily life such changes are-. Social changes are inexorable 
in their execution; for they are backed by the force of 
general public opinion to which - the individual must in- 
evitably bow. 

But it is not social custom alone that determines the 
nature of the business unit. Many types of business forms 
are the direct outgrowth of economic development. The 
great industrial plants of today employing tens of thou- 
sands of workers and millions of dollars' worth of machinery 
and equipment in their manufacturing processes, are of 
relatively recent development. Their structure rests upon 
the foundations laid by the great mechanical inventions of 
the latter part of the eighteenth century that ushered in the 
industrial revolution. Prior to that time, manufacturing 
was done very largely by hand methods in the home of the 



THE CONCEPT OF CAPITAL 7 

worker who enlisted the services of the members of his 
family to aid him in his work. But all this has changed. 
Today the factory system dominates our industrial life, 
markets are no longer limited, but are world wide, competi- 
tion is no longer domestic but has become international. 
It would have been strange, indeed, had these revolutionary 
economic changes brought about no new developments 
in business organization and practices. 

Economic development usually proceeds at a somewhat 
more rapid pace than change in social customs or concepts. 
Inertia and stability are the marked characteristics of the 
latter. We do not like to change our mode of life; and 
when economic forces begin to press upon us, we are in- 
clined to appeal to the political institutions that we may 
have set up as government to secure legislation against the 
threatened change. In this we attempt to retard or fore- 
stall the inevitable economic development. History fur- 
nishes us with many examples of laws and ordinances 
against the use of various mechanical appliances introduced 
to supplement hand manufacturing processes. Stringent 
laws against usury were passed to prevent the lending out 
of money at interest. Trade unions, also^ were vigorously 
suppressed by law when they first began to assume im- 
portance. The legal fights against monopoly of raw materi- 
als in certain industries, and of markets in others, is still 
a moot question of the day in the United States. But 
legislation cannot definitely block general economic de- 
velopment when the latter takes place normally and spon- 
taneously. In such cases social custom will, through steady 
and continual pressure, be forced into a new mold, finally 
tolerating as factors in the social system economic institu- 
tions that it found it difficult or impossible to suppress. 

Between the forces of economic development- and the 
counter forces of social custom, we find the business insti- 
tution plastic, yielding to pressure applied here or there 



8 ECONOMIC AND LEGAL FUNDAMENTALS 

when the impelling force is strong enough, and resisting if 
the force is weak. Under these conditions plasticity rather 
than rigidity characterizes the business institution, and 
scarcely a decade passes that does not leave some mark of 
change upon its features. 

The Concept of Capital and its Influence upon the 
Ownership Organization. — The types of business organi- 
zation employed in the conduct of business at a given time 
are simply phenomena attendant upon a given stage of 
economic development. The fundamental element that 
distinguishes one type from another is found to be the 
relationship that exists between the entrepreneur and his 
business undertaking as well as the character of the capital 
risk that he assumes. The concept of capital, therefore, 
is the keystone of the whole arch. Society having once 
fully accepted a given concept of capital or wealth that 
has arisen out of economic development thereby places the 
stamp of approval upon the particular type of business 
organization that is built up around that concept. This 
does not mean to convey the idea that all types of business 
organization at a given time are based upon the latest de- 
velopment in the concept of capital; for such is not the 
case. A new concept of capital does not supplant its pred- 
ecessors but rather is added to them. For this reason the 
types of business organization prevailing today are the 
accumulated products of economic and social progress. 

In order to enable the reader to understand clearly the 
distinctions differ enti at ing the several types of present-day 
business organization, it will be necessary to sketch briefly 
the development of the economic stages based upon the 
changing concept of what constitutes business capital. Be- 
ginning with the dark ages following the collapse of ancient 
civilization, three such economic stages can be distinguished. 
First, that stage in which the concept of capital is restricted 
to commodities; second, in which it is widened to include 



THE CONCEPT OF CAPITAL 9 

money in addition to commodities ; and third, in which it is 
still further extended to include securities in addition to the 
other two. 

There are no clear-cut breaks separating one of these 
periods from another. The transition is gradual. It de- 
velops like the transportation system of a new country. At 
first wagon roads are sufficient to meet its requirements, 
and to give it access to the outside world, but it 
may grow, and the time will come when the wagon road 
will no longer suffice. A railroad is now constructed to 
operate side by side with former means of transportation. 
Later on a street railway system or a canal makes its 
appearance. Thus, where we at first had but a single 
avenue of trade we now have many. The great volume 
of business will naturally follow the most serviceable chan- 
nel while the others would be used as supplementary 
vehicles. And so it is with the several forms of ownership 
organization that are in use today. They have been of 
gradual development. New types have been evolved as 
new needs arose, only to be added to those already in ex- 
istence. But, before these new types can be used effectively 
the capital concept must first have become sufficiently 
broad to give new life to the form. To trace in full the de- 
velopment of the concept of business capital, would re- 
quire far more space than the limits of this work permit. 
Consequently only the briefest and simplest explanation 
will be attempted. 

1. The stage of goods as capital. — This first stage of 
economic development is characterized by a limitation of 
the concept of capital so as to include only goods or com- 
modities. A man's wealth is based upon his possession of 
things and he is spoken of as rich or poor according to the 
number of cattle, acres of land, bushels of wheat, etc., 
that he owns, without ascribing to them a money value. 
The method employed in effecting business transactions in 



10 ECONOMIC AND LEGAL FUNDAMENTALS 

this stage shows a gradual transition from the practice of 
simple exchange of one commodity for another to trans- 
actions based upon money as a common medium of ex- 
change. For convenience let us, then, divide it into two 
periods: (a), the simple barter period and (6), the 
medium of exchange period. 

(a) The barter period. — In the barter period the busi- 
ness transaction consists of a direct exchange of one good 
or commodity for another without the use of money. The 
merchant brings his wares with him and takes away those 
wares for which he has exchanged his own. The diffi- 
culties standing in the way of a free exchange of commodi- 
ties under this system militate against any pronounced 
development of commerce and tend to make communities as 
nearly self-subsisting as possible. Itinerant merchants 
who negotiated single transactions were fairly common, 
and the practice soon grew of holding periodic fairs to 
which all could bring their surplus products to barter them 
off for what they might happen to need. Such transactions 
ordinarily necessitated an actual contact between the buyer 
and the seller, a personal inspection of the wares and an 
agreement as to the basis of exchange. In consequence of 
these difficulties, permanent business establishments such as 
we have today can hardly have existed. Barter trading is 
still carried on in civilized communities in a desultory 
way and with the uncivilized natives of certain parts of the 
world, as in the Kongo region, where the European trader 
exchanges his glass beads, trinkets, and cutlery for ivory 
and rubber, and among the African natives themselves. 
More permanent business establishments of this class are 
the fur trading posts of the Canadian northwest. The 
amount of business done in this way is, however, quite in- 
significant when compared with the total transactions of 
any industrial country. 

(b) The medium of exchange period. — In the second 



THE CONCEPT OF CAPITAL 11 

period of this stage a general medium of exchange is intro- 
duced into the business transaction to facilitate trade. At 
first this may be simply a product common to the com- 
munity. Thus rice, beaver skins and tobacco were used 
for such a purpose by the early English colonists in North 
America. This good then becomes the measure of value 
for all others while it, at the same time, retains its in- 
trinsic value. Such media of exchange are usually some- 
what bulky and inconvenient, and are eventually dis- 
carded for a universal medium that may be simply a token, 
of little or no intrinsic value, as the wampum of the North 
American Indian or the sea shells of the South Sea 
Islanders. But even these gradually give way to metallic 
money whose qualities of divisibility, durability, uni- 
versality, high exchange value and relative light weight, 
etc., make it an excellent medium of exchange. With this 
development the act of making business transactions is 
greatly facilitated. It now becomes possible, as well as 
convenient, to establish permanent business where transport 
facilities permit of bringing together a sufficiently diversi- 
fied stock of goods. The fairs which were the most promi- 
nent characteristic of business in the preceding period 
wane and become gradually of less and less importance, 
until they give way almost entirely to permanent estab- 
lishments operated as individual proprietorships or part- 
nerships. 

However, throughout this whole stage money itself is not 
looked upon as wealth, but merely as a convenient medium 
of exchange. Its use, to be sure, gradually increases, 
especially with the merchants who employ it extensively to 
facilitate their business transactions, but who, neverthe- 
less, derive no direct profit from it. Public opinion is 
not ripe for this, and attempts on the part of merchants or 
other possessors of money to thus utilize it, for example, by 
levying taxes in terms of money instead of in kind or by 



12 ECONOMIC AND LEGAL FUNDAMENTALS 

lending it out at interest, meets with strong disapproval. 
This reflection of the public sentiment is well illustrated by 
the numerous laws and bans of the church against usury, 
so common in Europe during the early middle ages. 

2. The money capital stage. — In the preceding stage 
we have seen how money gradually becomes an important 
element of the business transaction. At what point, then, 
does it begin to be looked upon as capital? The exten- 
sion of the concept of capital simply follows the natural 
channel of economic progress. As the merchants and 
traders were the first to employ money quite generally in 
their business, they soon found it convenient to value 
their stock of goods, to keep their accounts and to cal- 
culate their profit and to pay their taxes in terms of money. 
A stock of goods to them was a money investment from 
which they sought to derive an income. Here then^ is the 
embryo that later develops into the concept of money capi- 
tal. In the preceding period personal labor was looked 
upon as the only source of income, for then the idea of 
the productivity of capital did not exist, merely because it 
was not calculable. The idea of income, the striving to 
derive a return from capital is the great characteristic of 
capitalistic industrialism. It is at this point, also, where 
the distinction between the capitalist and laborer arises. 
The laborer works only by request or order, whereas the 
capitalist entrepreneur produces for stock or for the mar- 
ket. Naturally the entrepreneur assumes an entirely dif- 
ferent element of risk than the laborer, for he risks not only 
the capital tied up in his wares, but eventually also that 
represented by his business plant and equipment. Capital 
risk is a characteristic of the money capital stage of in- 
dustry that distinguishes this from the preceding stage. 
It cannot be held, however, that the wage worker assumes 
no risk; for he does assume a risk which, under certain 
conditions, may be greater and more dangerous than that 



THE CONCEPT OF CAPITAL 13 

of the capitalist, namely, the risk of failure to secure suffi- 
cient work to sustain himself. But this distinction is to be 
noted — he cannot calculate his risk in terms of money. 
Money, then, becomes capital only when the possessor 
thereof can derive an income from it by risking it in- 
directly in the form of wares, plant, equipment, etc., valued 
in terms of money, or directly in the form of a money loan. 

The above definition clearly distinguishes between two 
periods of money capital: first, when it is used as the 
chief measure of value for commercial and industrial under- 
takings; and second, when it is employed directly as loan- 
able funds. The first period may be called the commercial 
capital period. It is in this stage, then, when it first be- 
comes possible to establish a business with stock, equip- 
ment, wares, etc., procured with borrowed funds. This 
period witnesses the development of great commercial 
undertakings, while the second is characterized by the rise 
of business institutions peculiarly adapted to handle 
money capital, e. g., banks, and at a somewhat later time 
exchanges. It is out of these two roots that the concept 
of securities capital has grown. Out of commercial capital 
arise stocks, the chief form of ownership securities, and 
out of loan capital bonds or credit securities. 

It is of course self-evident that neither money, nor securi- 
ties create new economic capital. The lender of money 
to a business undertaker and the purchaser of bonds, secures 
thereby only the right to demand a share of the earnings 
which the debtor seeks to procure from the productive use 
of his economic (commodity) capital or his personal ser- 
vices. But from the standpoint of the economist these 
borrowed funds become capital only when they are risked 
by investment in some enterprise, as in transforming them 
into conmiodity capital. It is merely a complex process of 
substitution, whereby capital funds are made fluid and be- 
come generally available to those entrepreneurs who pos- 



14 ECONOMIC AND LEGAL FUNDAMENTALS 

sess insufficient quantities in their own right properly to 
conduct the enterprises which they undertake. 

The entrepreneurial organization, — the form of organi- 
zation under which business is conducted, — shows in this 
stage great development and change. To the individual 
proprietorship and the partnership are now added new 
forms. Joint undertakings, or " joint adventures " as they 
are also called, with ownership represented by divisible, 
transferable shares; joint stock companies with their in- 
divisible shares, and the corporation make their appear- 
ance. 

This development coupled with the economic advance- 
ment brought about by the great mechanical inventions of 
the industrial revolution in the latter part of the eighteenth 
century stimulate a rapid growth in the size of business 
units. They demanded vast sums of capital which could 
not be secured without the use of securities as instrumen- 
talities of organization. 

By the general term " securities " we mean that class of 
commercial paper that is issued in large numbers of units 
of like denomination and kind for a relatively long term of 
years, that are freely interchangeable and transferable, 
and to which attaches a right to a share in the earnings 
of the business and a claim to the capital which they repre- 
sent. They are of two types: stocks which represent an 
ownership interest or contributions of capital to remain 
permanently in the business, and bonds representing a 
creditor's interest or funds loaned to the business but which 
must be returned to the holder of the bond at a definite 
time. 

As long as it was impossible to give to real or money 
capital the security form, an entrepreneur who had insuffi- 
cient capital in his own name could round out his require- 
ments only by personal dealings with someone who had 
real or money capital to lend. The institution of credit, as 



THE CONCEPT OF CAPITAL 15 

well as the entrepreneurial organization, from the individual 
proprietor to the most ramified type of partnership, without 
the concept of securities capital, must rest upon a personal 
relationship, a legal joint contract between the parties at 
interest. But how different the joint stock company and 
the corporation! Not only are money funds made avail- 
able through fluidity, but even the real, or goods capital, of 
enterprises becomes fluid in so far as ownership is con- 
cerned. The possessor of a small quantity of ready funds 
can, by utilizing them in the purchase of securities, be- 
come a participant in the largest industrial or commercial 
undertakings of the day. In so doing, to be sure, he assumes 
the risk attendant upon an entrepreneurial relationship, or 
as a creditor, to such enterprises, but his chances of obtain- 
ing a relatively large profit are good, perhaps even better 
than he might obtain by turning his money over to a bank 
in the form of a savings deposit. The outstanding effect of 
widening the source of funds for business undertakings 
through the issue of securities has increased correspond- 
ingly the number of those whose income consists only of 
the returns from their security investments; in other 
words, who enjoy an income quite independent of any 
labor on their part. During the stages previously discussed 
such an income was possible only to a comparatively 
limited degree, as when a land owner let his land out on a 
long time lease to others. For even if he had large sums 
of money to lend out, he could have done so safely only by 
diligently investigating the risk entailed by each individual 
loan, basing his^ decision largely upon the personal char- 
acter and estimated business ability of the borrower. One 
is quite safe in saying, that it would have been impossible 
to bring together the vast quantities of capital employed by 
our great modern industrial and commercial establishments 
without first having evolved a plan of making the posses- 
sion of real capital, privately owned, an impersonal matter. 



16 ECONOMIC AND LEGAL FUNDAMENTALS 

This the use of securities as instrumentalities of organiza- 
tion has succeeded in doing without breaking down the idea 
of private property. 

3. The Securities Capital Stage. — However, the idea of 
the use of securities as business capital has not attained its 
complete development with the general use and acceptance 
of securities as instruments of organization. The develop- 
ment must go still further until the entire business capital 
of an enterprise may consist essentially of the securities 
issued by other business organizations to the practical ex- 
clusion of the other forms of capital, so that a new business 
may be formed to issue securities to represent a capital that 
consists entirely of securities. This concept now prevails in 
all of the more advanced industrial and commercial coun- 
tries of the world. 

To that class of business organization that issues se- 
curities to represent a capital consisting in greater part of 
securities of other concerns, Professor Robert Liefmann has 
aptly given the name of securities-substitution companies.^ 
They embody the principle of the holding corporation and 
include such types as the control company, the investment 
trust, the finance company and the assumption company. 
While they create new business enterprises, they do not 
add to the producing equipment of the country in which 
they exist. They are essentially organizations that with- 
draw securities from the public to hold them in reserve in 
vaults and banks in order to accomplish the purpose for 
which they were organized; whether this be to continue 
existing organizations under a single control, to average the 
profits accruing to a large variety of securities, to finance 
new securities-issuing companies or to relieve finance 
companies from an overburden of securities. They are the 
highest, as well as the most flexible and elastic type of 
ownership organization that has, as yet, been developed. 

^ Robert Liefmann, Beteiligungs und Finanzierungsgesellschaften, 
Jena, 1913. 



THE CONCEPT OF CAPITAL 17 

Influence of Large Scale Production and Competition 
on Organization. — While the development of the concept 
of business capital has called into being certain new forms 
of ownership organization, large scale production and 
competition have given an impetus to the revival of old 
and time-worn institutions to bring about closer co-opera- 
tion between business enterprises within the same industry. 
The productive capacity of established enterprises is keyed 
up to meet a maximum demand for goods. But this de- 
mand, influenced by many economic factors, is constantly 
fluctuating — now increasing rapidly, now falling off. The 
modern business establishment must operate at somewhere 
near maximum capacity to be profitable, and consequently 
the effect of fluctuations in the demand for its products 
tends to bring about a state of '^ cut-throat " competition, 
that must naturally result in a battle for the survival of the 
fittest. The result is combination. 

Combination in industry may be for the purpose of 
assuring the combining units a share of the market for 
their products, for the purpose of assuring themselves 
supplies of raw materials to enable them to produce at 
lower costs, or to obtain a monopolistic command over the 
industry. These forces, as will be explained more fully in 
later chapters, give rise to new forms of organization, 
which, however, largely make use of the prevailing forms 
of ownership organization, supplemented by the legal insti- 
tution of contract. Thus, we have, today, commercial asso- 
ciations, chambers of commerce, factors, agreements, pools 
and kartells, and monopolies and trusts. 

While it is not the purpose of this work to go into an ex- 
haustive study of the problems incident to combinations 
and trusts, the work would be lacking in completeness, were 
we to omit a description of these most important forms of 
organization. But to do more than this would necessitate 
an expansion of the work beyond the limits indicated by 
its title. 



CHAPTER II 

THE LEGAL FOUNDATION OF ORGANIZATION 
IN BUSINESS 

The economic principles laid down in the preceding 
chapter are of general application in all modern industrial 
countries, and through these they have influenced the types 
of ownership organizations that are to be found in less de- 
veloped lands. But, at best, these principles furnish u& 
only the skeleton of the organization without the technical 
arrangements which are so necessary to give it life. These 
technical arrangements are prescribed and defined by com- 
mon and statute law in each country. The result is, that, 
while the corresponding forms of organization are recog- 
nizable from country to country, they nevertheless, exhibit 
considerable variation. The legal foundation upon which 
they must be erected in a given country may differ radically 
from that of another. Thus a thorough knowledge of the 
commercial or business law of each nation would be neces- 
sary for a complete understanding of its ownership organi- 
zations. However, rather than to attempt to describe the 
vast multitude of technical legal requirements pertaining to 
this subject that are to be found in the larger industrial 
countries, we shall confine ourselves for the most part to 
a consideration of those that prevail within the United 
States and refer only incidentally to variations to be found 
in other countries. 

The Legal Foundation. — The system of jurisprudence 
of the United States is of English origin. It is a bifurcated 
system made up of the common law and the statute law. 
The common law consists chiefiy of an accumulation, over 

18 



THE LEGAL FOUNDATION 19 

a period of many centuries, of customs as interpreted by 
court decisions and consequently is based almost entirely 
upon precedent. Statute law comprises all acts of the state 
and federal legislative bodies in so far as they are within 
the constitutional limitations set by the people. Statutes 
modify the common law principles wherever the two do 
not agree. Hence, in any application of law, the federal 
constitution is held to apply first, the state constitutions 
second, the statutes third and the common law last, each, 
however, within its own sphere of jurisdiction.^ 

In the United States, the influence that government has 
on business is of a two-fold nature; on the one hand, that 
exercised by the state governments, and on the other, that 
exercised by the federal government. The effect of the 
tenth amendment to the constitution of the United States 
is to make the federal government one of delegated powers 
only, while all residual powers remain vested in the indi- 
vidual states. It follows, therefore, that any state may 
freely pass any legislation affecting business, except in such 
matters as are specifically reserved to the United States or 
denied the several states by the federal constitution, or are 
found to be contrary to the provisions of the constitutions 
of the several states. 

Among the more important restrictions on the power of 
the states to legislate upon business or to interfere with it, 
are prohibitions against laws impairing the obligation of 
contracts, laws seeking to deny to the citizens of each state 
the privileges and immunities of the citizens of the several 
states, and laws^ seeking to levy duties on imports and ex- 
ports of any other state, which naturally would be legisla- 
tion on interstate and foreign commerce, control over which 
is vested in the federal Congress. 

The powers delegated to the United States Government 

1 It should be noted that the State of Louisiana does not follow 
the English law but has adopted in a modified form the Napoleonic 
Code of France. 



20 ECONOMIC AND LEGAL FUNDAMENTALS 

that affect business more or less directly are contained in 
Section 8 of Article I of the Constitution. They include 
the following: 

L To regulate commerce with foreign nations and among 
the several states 

2. To establish uniform bankruptcy laws throughout the 
United States 

3. To coin money and to provide a system of currency 

4. To fix the standard of weights and measures 

5. To establish post offices and post roads 

6. To grant patents, copyrights and trade-marks 

7. To levy taxes, duties, imposts and excises 

8. Under the sixteenth amendment to the constitution, to 
levy and collect taxes on incomes. 

Section 9 of Article I of the Constitution places certain 
restrictions upon the power of Congress to legislate on mat- 
ters affecting business. It prohibits Congress from levying 
export duties on articles exported from any state, from 
favoring the ports of one state as against the ports of 
another through any regulation of commerce or revenue 
and from levying duties on vessels engaged in interstate 
trade. 

Federal Laws and Entrepreneurial Organization. — It 
is, therefore, apparent that privately conducted business is 
more intimately concerned in the regulatory laws and acts 
of the several states than in those of the federal govern- 
ment. But the growth in size of the average business estab- 
lishment, the extension of markets and the efficiency of 
transportation systems has made American big business 
characteristically interstate, and because of this, the weight 
of federal statutes regulating interstate commerce is 
exerting an ever-increasing pressure on the business 
world, in this way bringing the business man into 
more intimate relationship to the federal government. 



THE LEGAL FOUNDATION 21 

Moreover, the continuation of the process of integra- 
tion and concentration of commerce and industry through 
the combination and absorption of business units by 
others, resulting in such gigantic business establish- 
ments as the United States Steel Corporation, the Allied 
Packers, and the United Retail Stores and hundreds 
of others, will, in the near future, make it imperative upon 
the federal government to extend its legal control, not only 
over their methods of competition, but also over their 
ownership relations. This does not mean that the federal 
government has kept its hands off business; for it has, on 
the contrary, passed many laws against combinations in 
restraint of trade, regulating railways, etc., but in the 
main, its legislation has been confined to regulation of 
interstate commerce, and to attempts to preserve a state 
of free and fair competition. These acts, in so far as they 
affect business organizations, apply largely to the higher 
types. An explanation of them is, for this reason, de- 
ferred to a following chapter. 

State Laws and Entrepreneurial Organizations. — Under 
the English common law nearly all of the types of entre- 
preneurial or ownership organization that now are in gen- 
eral use might be formed, though, in some cases, with con- 
siderably restricted powers. Such entrepreneurs as found 
it desirable to secure advantages in the matter of business 
organizations which the common law did not afford, found 
themselves obliged to appeal to some state legislature to 
secure a special act empowering them to enjoy, and to use, 
the desired privileges. This condition resulted in fraud, 
bribery and many other abuses carried to an unheard of 
extent. Finally, the people of the several states, tiring of 
these practices, prevailed upon their legislatures to adopt 
general laws that would apply to all alike. These general 
statutes apply, in general, to all types of organizations in 
which the risk of loss of the entrepreneur is linaited to a 



22 ECONOMIC AND LEGAL FUNDAMENTALS 

more or less predetermined amount, as in certain types of 
partnerships and in the corporation. 

Domestic and Foreign Organizations. — It is through 
these general statues that the peculiar arrangement of our 
government that vests the states with residual powers 
makes itself felt. Any one of the forty-eight states of the 
union may adopt legislation creating new and untried types 
of entrepreneurial organization, vesting them with special 
powers and privileges which, again, might be denied them 
in adjacent states. Such organizations are accordingly 
spoken of as being domestic in the state under whose laws 
they were created, and as being foreign in all other states. 
Since the legal jurisdiction of any state does not extend 
beyond its own boundaries, it follows that all of the states 
have, in general, the power to limit or restrict as they 
please the activities of foreign business organizations of the 
type in question. They may even exclude them entirely 
from doing business within their jurisdiction, provided, of 
course, that they treat alike all foreign organizations, of a 
given class, and do not interfere with interstate business. 

Greater Freedom of Common Law Organizations. — 
Generally speaking, the rights, powers, privileges and im- 
munities of business organizations based upon common law 
are the same in all of the states, except in those cases where 
common law principles have been modified by statute. As a 
result of this general rule, it follows that business organiza- 
tions based upon common law, as is quite generally the 
case with the individual proprietorship and the pure part- 
nership, enjoy a relatively greater freedom of action than 
do those organizations that are created by statute. 

Comparative Qualities of Entrepreneurial Organiza- 
tions. — To enable one clearly to understand the legal dis- 
tinctions that differentiate the types of entrepreneurial or- 
ganizations from one another, some basis of comparison 
must be employed. In seeking such a basis of comparison. 



THE LEGAL FOUNDATION 23 

we find that all entrepreneurial organizations have some 
qualities in common, but that they possess these qualities 
in varying degree of intensity. A brief discussion of each 
of these comparative qualities will make the distinctions 
clear. 

(a) Method of formation. — Entrepreneurial organiza- 
tions may be established either by the simple volition of 
a single individual, by contract between two or more in- 
dividuals, or by state authority. An individual who has an 
idea, the necessary capital and the will to become an entre- 
preneur needs only to combine these, and to set up his 
establishment at his own pleasure. But, if he feels that 
the undertaking is too big for his own resources, and he 
desires to have others go into the venture with him as part- 
ners, the necessity for an agreement among them, as to 
the share of each in the business, becomes imperative. Such 
an agreement in the eyes of the law would be a contract 
which may be altered only by subsequent agreement of the 
parties thereto. If his proposed undertaking will require 
the combined resources of many individuals, he may find 
the contractual relationship among them impractical, 
which circumstance may lead to the adoption of an organi- 
zation such as would obviate the need of such a binding 
contract as the partnership agreement. He would, in such 
a case, most likely adopt the corporate form of organiza- 
tion and issue securities. However, to do this, he must 
secure the proper authority from the state and proceed ac- 
cording to state law. 

(6) Liability of the entrepreneur. — In business par- 
lance, the term liability refers to the financial obligation 
assumed by the entrepreneur. It is held to be unlimited 
when the creditors of the business have the lawful right, 
through proper court procedure, in case of the insolvency 
of the entrepreneur, to apply all ^ of his real and personal 

2 There are always certain exemptions under federal and state 
laws. 



24 ECONOMIC AND LEGAL FUNDAMENTALS 

property toward the satisfaction of their claims against 
him or his business. In former times, when an entrepreneur 
went into bankruptcy, all of his property could be seized 
by his creditors, and he, hunself, should his property 
be insufficent to pay his creditors in full, could be 
thrown into prison until all of his debts had been 
paid. Under modern practice, however, the entre- 
preneur is discliarged from any further obligation on 
surrendering all of his property, unless there is evi- 
dence of deceit or fraud. The modern theory thus places 
upon the lender, as well as upon the borrower, the risk 
of credit transactions. The curtailment of the power of 
the creditor over the debtor has been carried still further by 
laws providing for limited liability of entrepreneurs under 
certain types of organization, such as the corporation and 
the limited partnership, whereby the creditor may look 
ordinarily only to assets of the business, as distinct from 
the other property of the entrepreneur, for the satisfaction 
of debts. Limited liability is only assuredly procurable 
through authorization by the state, which then protects the 
creditor, in part, by giving public notice of any grant of 
limited liability. 

(c) Ease with which the required capital may be pro- 
cured. — Statistics indicating the rapid and steady increase 
of the capital requirements of the average manufacturing 
establishment, showed, in 1914, that this had reached the 
sum of $76,952. This amount is considerably in excess of 
what the average business man has at his command, either 
in funds that he himself owns, or that he may borrow. 
Moreover, even if an entrepreneur were fortunate enough 
to launch an average manufacturing establishment with- 
out outside assistance, it is yet questionable whether he 
would find it advisable to adopt a form of organization 
that would involve him in unlimited liability, when it is 
relatively easy for him to limit it. The question of busi- 



THE LEGAL FOUNDATION 25 

ness expansion, also, is important in this connection. If 
all owned and borrowed funds that can be procured under 
the unlimited liability types of organization are already in 
use, it will be very difficult to secure additional funds for 
the purpose of expansion. For an individual is not likely 
to assume a share of the entrepreneurial function in such an 
enterprise, when by so doing, he assumes, irrespective of his 
associates in the business, the full legal responsibility not 
only for all the standing debts, but also for the debts that 
may m future be incurred. For this reason, the number of 
individuals who can be taken into such an organization as 
entrepreneurs is relatively small, which fact in turn limits 
the supply of funds that may be drawn on. But if, on the 
other hand, it is a type of organization which limits the 
legal liability of the entrepreneur to that amount which he 
puts into the business, the chances of securing additional 
capital are thereby made much greater. Indeed, the limited 
liability form of securities-issuing organizations have on 
tap practically an inexhaustible supply of loanable funds 
to draw upon through the sale of securities, while the un- 
limited liability, and non-securities-issuing forms must 
very largely be content with such funds as the private 
fortunes of a few intimately acquainted persons might 
provide. 

(d) Durability and Stability. — The quality of dura- 
bility and stability is a criterion by which the possible span 
of life of an entrepreneurial organization may be judged. 
It is primarily concerned with those acts or conditions that, 
in the eyes of the law, will, ipso facto, break up the business 
unit. A little reflection enables us readily to classify them 
into two groups; namely, those that are voluntary, and 
those that are involuntary. In the first instance the disso- 
lution of the organization is based upon the personal desire 
of the entrepreneur to dissociate himself from his business, 
while in the second, it results usually through the operation 
of law, regardless of the desire of the entrepreneur. 



26 ECONOMIC AND LEGAL FUNDAMENTALS 

The ease with which the voluntary decision of an indi- 
vidual to discontinue his entrepreneurial relationship to a 
given business enterprise can be carried into effect, depends 
upon the legal nature of the act creating the organization. 
If it has been created by simple voluntary act on the part 
of a single individual, it may be dissolved in the same way, 
for example, by the sale or discontinuance of the business 
by the individual entrepreneur. Where the organization 
has been established by a contractual relationship between 
several individuals, this freedom, on the part of the entre- 
preneur, to withdraw at will is much limited and restrained 
by legal bonds. The withdrawal of any one of the entre- 
preneurs in such cases constitutes a breach of contract, un- 
less withdrawal is provided for in the contract agreement, 
or acquiesced in by the other contracting parties. In 
either case, however, such an act is held at law to be an 
abrogation of the contract; the result of which is to ex- 
tinguish the organization that the contract brought into 
being. 

In the case of those organizations that employ the se- 
curity form of capital, voluntary dissolution cannot be 
brought about by the withdrawal of any one of the entre- 
preneurs interested; for the relationship of the entrepreneur 
to such a business organization is purely impersonal. The 
business continues to exist intact, because the entrepreneur 
who retires cannot withdraw capital from it, but merely 
transfers his interest in it by divesting himself of title to 
its securities. To accomplish the voluntary dissolution of 
this type of organization requires a full compliance with 
the provisions of the grant of authority given by the state 
in the first instance, by virtue of which the organization 
was established. However difficult of accomplishment this 
may be, it nevertheless still leaves to the will and desire 
of the individual, the matter of the continuance or discon- 
tinuance of his entrepreneurial relationship to the business. 



THE LEGAL FOUNDATION 27 

Voluntary dissolution of business organizations is, on the 
whole, not difficult to carry into effect. Under the indi- 
vidual proprietorship, no fixed procedure whatever need be 
followed; under the personal contract forms, a simple con- 
tract similar to that creating the organization may be em- 
ployed, while under the securities-issuing types of organi- 
zation, the procedure to be followed is clearly defined and 
prescribed by law. 

Involuntary dissolution of the entrepreneurial organiza- 
tion may arise from three general causes, i. e., (1) from 
the death of the entrepreneur, (2) from operation of law 
and (3) from social revolution. Dissolution by death of the 
entrepreneur takes place only in the lower forms of organi- 
zations such as the individual proprietorship and the part- 
nership, but can hardly be effected through that cause in 
the case of the corporation. For the latter type of organiza- 
tion is a child of the law, created as an entity in itself, with 
ordinarily a fixed, predetermined period of life. The ex- 
istence of certain conditions within the business, as for ex- 
ample, insolvency, and also the commission of certain acts 
by the entrepreneur, that are either fraudulent in nature, 
in direct violation of law, or that impair the solvency of the 
business, will, by operation of law, force the organization 
into dissolution. Since, in the pure partnership, each part- 
ner has unlimited liability, it follows that the insolvency 
of any partner impairs the solvency of the business, and 
causes dissolution. In so far as social revolution is a force 
making for the dissolution of entrepreneurial organizations, 
it goes almost without saying, that any social upheaval that 
would result in the establishment of a different industrial 
system than that now in effect, would undoubtedly make 
an end of some of the present forms of business organi- 
zation. 

Summarizing, then, the various aspects of the quality of 
durability and stability, we find on the one hand, that 



28 ECONOMIC AND LEGAL FUNDAMENTALS 

voluntary dissolution becomes relatively more difficult as 
the complexity of the organization increases, being easiest 
to accomplish in the case of the individual proprietorship 
and most difficult in the case of the corporation ; and, on the 
other hand, that involuntarily dissolution may arise most 
easily where the organization is based upon a personal con- 
tractual relationship, and is perhaps less likely to take 
place in those organizations that enjoy a definite period of 
life under grant of the state. 

(e) Ease of direction. — Under our prevailing industrial 
system, the activities of any business unit must be directed 
and administered primarily with the aim and purpose in 
view of returning a profit to the entrepreneur. This function 
presents a host of problems for whose solution the respon- 
sibility ultimately rests upon the entrepreneur himself; for 
he is, as it were, the court of last appeal in all matters 
affecting his business. We find him thus, either directly 
or indirectly, confronted by the financial policy, the ques- 
tion of expansion or contraction of the business, the neces- 
sity of adopting a suitable form of administrative organi- 
zation, the selection and institution of a policy to govern 
the industrial relations between the management and its 
employees, the technical problems of production, buying 
and selling methods, and a great many others equally as 
vexatious and difficult. The degree of success or failure 
with which these problems are met and solved will serve 
also as a scale by which to measure the efficiency of the 
directive force behind the enterprise. 

Directness of control. — The legal responsibility for the 
direction of the business rests upon the entrepreneur. This 
circumstance leads easily to the argument that a direct 
control on the part of the entrepreneur is the most desirable. 
But under the several distinct forms of organization 
recognized by law, this direct contact cannot always be 
maintained. In the individual proprietorship and the part- 



THE LEGAL FOUNDATION 29 

nership forms, the full responsibility for the direction and 
management of the business is usually assumed by the 
entrepreneur. This is more or less inherent in these forms; 
although in the latter type, through contractual agreement, 
one or more of the partners may limit their right of direc- 
tion to the extent of actually withdrawing from any active 
participation in the affairs of the business, thus becoming, 
as it were, " silent partners." Moreover, what in the lower 
forms of organization, is a conscious, voluntary limita- 
tion of the power of direction on the part of the individual 
entrepreneur, becomes, in the more complex forms, an un- 
avoidable requirement of the law. Thus, in the corpora- 
tion, we find the entrepreneurs, who are the stockholders, 
directing the affairs of their business, with but few excep- 
tions, through the medium of a board of directors chosen 
by them for that purpose. Such an arrangement can have 
but one result. It leads inevitably to lack of interest on 
the part of the entrepreneur in his business. But, where 
the number of entrepreneurs engaged in a single business is 
very large, it would seem to be almost impossible to direct 
the undertaking without introducing some such directive 
body into the organization. 

Secrecy. — However, the relative efficiency of the direc- 
tive machinery of the several types of entrepreneurial or- 
ganization is not to be measured solely by directness of 
control. There are other factors that also must be con- 
sidered. Thus, secrecy, where it is essential to the business, 
is more easily manitained if there is but a single entre- 
preneur, or at most, if the number is small. The chance 
of disclosure of secret processes naturally tends to increase 
proportionately with the number of persons entrusted with 
their safekeeping. But even very large organizations have 
been known to keep secret important formulae and proc- 
esses in the face of concerted efforts on the part of com- 
petitors to discover them. This feature has been one of 



30 ECONOMIC AND LEGAL FUNDAMENTALS 

the marked characteristics of the German chemical and 
dye-stuff industries. Nevertheless, the simpler types of 
organization seem to offer some little advantage to the 
entrepreneur in this respect. 

Centralization. — Another aspect of the question of effi- 
ciency of the organization for purposes of direction, is pre- 
sented by consideration of the quickness with which action 
may be taken. Here again, the advantage lies with the 
simpler forms, due to the possibility of greater concentra- 
tion of authority under them. The position of the entre- 
preneurs in the several types of organization in this par- 
ticular may well be compared with the absolute monarchy, 
the pure democracy with full power to act vested in each 
member, and the representative democracy which may act 
only through its duly elected representatives. The indi- 
vidual entrepreneur, as the absolute monarch, may act 
while the others are considering the matter. The partner- 
ship like the pure democracy, would find much difficulty in 
adopting a plan of procedure if the constituency is very 
large. The entrepreneurs of the corporation, like the citi- 
zens of the representative democracy, have given up some 
of their directive powers for the sake of securing prompt- 
ness of action. 

Specializpition. — Promptness of action, however, is not 
secured without some sacrifice. Nearly all of the problems 
of direction that confront the entrepreneur require that the 
one entrusted with their solution and direction have some 
special knowledge, or skill, in each special field. In case 
the business is a large one, administrators well versed in 
the principles of business finance, in marketing methods, in 
the technique of production and in the legal aspects of the 
business, are essential. What could be more desirable than 
to attach such experts to the business by means of the 
entrepreneurial bond, thus giving them a keener personal, 
as well as financial, interest by making them part owners 



THE LEGAL FOUNDATION 31 

of the business? This, then, is a question of hired as 
against associated assistants. In the case of the individual 
proprietorship, it is obviously impossible to have associated 
assistants. Here, centralization of direction is secured at 
the sacrifice of specialization. The pure partnership permits 
of some specialization through association of partners, but 
exhibits a great lack of centralization. Only in the higher 
forms of organizations does a balance between the two 
exist. They afford the opportunity of giving the specialists 
the amount of freedom of action they would seem to re- 
quire, while at the same time the possibility of over-special- 
ization may in part be guarded against by giving the 
specialists a proprietary interest in the business. 

The various aspects which the ease of direction of the 
several types of business organization presents, are such as 
the careful student of the problem of organization cannot 
well neglect to take into consideration. 

(/) Onerous obligations. — No type of business organi- 
zation leaves the entrepreneurs entirely free from certain 
onerous obligations. Some of the more important among 
obligations of this nature, are taxes and reports to the 
state and federal governments and to those who have a 
proprietary interest in the business. The simpler forms 
of organization are relatively free from these; but the 
higher forms, and more particularly the corporation, are 
heavily burdened with them. The necessity of requiring 
complete information concerning business establishments 
operating under limited liability to be recorded and 
filed where it will be available to those who have 
business relations with such concerns, is only too ap- 
parent. Their creditors must be advised of the limited 
liability of those with whom they do business. As 
the state takes upon itself the responsibility for grant- 
ing limited liability to entrepreneurs, so also, does it 
assume the responsibility for keeping on hand detailed in- 



32 ECONOMIC AND LEGAL FUNDAMENTALS 

formation relative to such grants. These records are open 
to inspection by the public. 

Because of the peculiar arrangement of our political sys- 
tem, any state may authorize a limited liability business 
organization which, however, may do business in other 
states only on sufferance of those states. Each state has the 
right and power of defining under what conditions the 
limited liability organizations of other states shall be per- 
mitted to do business within its boundaries; and in order 
to assure itself of full compliance with its laws, it requires 
the filing of detailed annual reports, and the payment of 
an annual license tax, as precautionary measures. It 
follows that organizations of this type, doing business in 
many states, may find themselves obliged to prepare and 
file with each of the several states annual reports on their 
financial condition, including assets, earnings, liabilities, 
etc., and to pay annually to each a franchise tax as a 
prerequisite to doing business. 

In addition to requirements pertaining to reports and 
taxes, there are also, in the case of the higher forms of 
organization, certain other obligations such, for example, 
as prescribe a course of procedure that must be followed in 
directing the activities of the business, namely, in directors' 
meetings, stockholders' meetings, etc. These regulations 
are intended, not only to protect those that have a pro- 
prietary interest in the business, but also those who have 
extended credit to it. The onerous obligations imposed 
upon the business, are seen to exhibit great variation, de- 
pendent upon the type of entrepreneurial organization 
adopted by those who establish themselves in business. 

ig) Legal status. — The legal status of the business or- 
ganization also, is of considerable importance to the en- 
trepreneur. The question that he must ask himself in this 
connection is " Will the business, as such, have a standing 
at law, and can it sue and be sued in its own name? " 



THE LEGAL FOUNDATION 33 

It is held, where the organization has been established by 
simple contractual agreement among the entrepreneurs, 
such as is employed to form the partnership, that the result- 
ing organization has, in itself, no standing at law that 
will enable it to sue or to be sued as an entity or person 
distinct from the persons of the partners. 

(h) Sphere of activity. — Business organizations viewed 
from the standpoint of their legal sphere of activity, that 
is, the latitude that they enjoy of exploiting a field of 
business and of changing, extending or narrowing their 
operations, fall into two general classes: (1) those that are 
unlimited in their freedom of action and (2) those that are 
obliged to confine their operations to specific objects. 

(1) The type of business organizations that enjoy un- 
limited freedom of action, may enter any field of business 
that is not specifically withdrawn from private enterprise, 
and that is otherwise lawful. Within these limits, they 
may shift from one type of enterprise to another, or ex- 
pand and contract at will, or discontinue the undertaking 
at will without formal procedure of any kind and without 
specific sanction of the state. They have the same right 
and freedom of action, in this respect, as a natural person. 

(2) Those that are limited, and must confine their ac- 
tivities to such objects as they have been specifically 
authorized to undertake and pursue, are such whose legal 
status is that of artificial persons, like the corporation. 
As artificial persons created by act of law, their powers 
and freedom of action are confined to those specifically 
granted in the act creating them. Thus, a corporation 
given authority to go into the paint manufacturing busi- 
ness, may not, of its own free will, go into the lumber 
business. If it chooses to do so, it must secure that 
authority from the same source from which it originally 
sprang. 

The importance of this characteristic of ownership types, 



34 ECONOMIC AND LEGAL FUNDAMENTALS 

as well as others that have been considered in the pre- 
ceding paragraphs, may easily be overemphasized. They 
are almost purely of legal significance and serve, not only 
as a means to measure and compare the efficacy of the 
several types of entrepreneurial organizations that are to be 
treated in this text, but also, in part, as a basis of classi- 
fication. 

Classification of Ownership Organizations. — A proper 
classification of entrepreneurial organizations must take 
cognizance, first, of the broad economic principles laid 
down in the first chapter and, second, of the legal charac- 
teristics peculiar to each type. 

The first well-defined basis of classification rests upon 
the kind of capital directly employed in the business ven- 
ture. From this standpoint, two groups are distinguish- 
able, (1) operating organizations which own, direct and 
manage a business plant and equipment consisting of real 
and money capital, and (2) combination organizations that 
employ capital in business through the medium of operating 
organizations. 

Next must be considered the intimacy with which the 
organization is attached to the life and financial soundness 
of the entrepreneur. A careful study of the legal charac- 
teristics of ownership organizations will lead, as in the pre- 
ceding case, to a division into two well defined classes, (a) 
personal ownership organizations and (6) securities-issu- 
ing organizations. The former are those that the 
law does not distinguish from the person of the entre- 
preneur, and which are legally terminated and dis- 
solved by the death or insolvency of any entrepreneur 
actively interested in them. They include the individual 
proprietorship, the participation association and the 
partnership. The other class includes those that con- 
tinue to live as business organizations in the eyes of the 
law even though one or more of the entrepreneurs should 



THE LEGAL FOUNDATION 35 

die or become bankrupts. The joint stock company, the 
corporation and the securities trust make up this class. 
The classification of primary types may now be recapit- 
ulated in tabular form as follows: 

Operating organizations : 

a. Personal ownership 

L The individual proprietorship 

2. Participation association 

3. Partnership 

b. Impersonal ownership (securities-issuing organi- 

zations) : 

4. The joint stock company 

5. The corporation 

6. The securities-issuing trust 



PART II 
PERSONAL OWNERSHIP ORGANIZATIONS 



CHAPTER III 

THE INDIVIDUAL PROPRIETORSHIP AND THE 
PARTICIPATION ASSOCIATION 

Personal Ownership Types. — The personal ownership 
types of entrepreneurial organizations include the indi- 
vidual proprietorship, the participation association, the 
partnership and the simple trust. Historically, they may 
be traced back to the earliest period of history. They are 
as old, therefore, as civilized society itself. With the pos- 
sible exception of the trust, they were well known to the 
ancient Egyptians, Greeks and Romans and particularly 
to the Phoenicians, who were the great commercial peoples 
of the ancient world. Through these many centuries they 
have come down to us with but slight if any modification, 
and as long as the institution of private property remains 
as one of the corner stones of our civilization, they will re- 
tain a place in the business world. But, as already indi- 
cated, the relative importance of these organizations for the 
conduct of business, has dwindled considerably during the 
past century. Nevertheless, their use today is still suffi- 
ciently extensive to warrant a careful consideration of their 
peculiar characteristics, their advantages and disadvan- 
tages as well as their general serviceability as ownership 
organizations. 

The Individual Proprietorship. — The individual pro- 
prietorship is a form of entrepreneurial organization in 
which the business is under the sole ownership, control and 
direction of a single entrepreneur who has risked his private 
fortune in the undertaking. It is the simplest form of 

39 



40 PERSONAL OWNERSHIP ORGANIZATIONS 

ownership organization. By reference to page 89 it will be 
shown to form the great bulk of the number of business 
establishments in this country, although from the stand- 
point of magnitude, based upon the number of wage earners 
employed and the value of product or amount of business 
done, its importance in the business field is relatively much 
reduced. The numerical preponderance of this type is 
accounted for by its simplicity of organization and direc- 
tion, and by the ease with which it may be formed, changed 
or discontinued, as well as by the circumstance that the 
average amount of capital required in the vast majority 
of business undertakings, particularly in the commercial 
field, is comparatively small. 

Characteristics. — The chief characteristics of the indi- 
vidual proprietorship have already been somewhat indi- 
cated in the preceding chapter. The legal rights, powers, 
obligations and limitations of this type are in general 
identical with those enjoyed by the person of the pro- 
prietor. The law does not recognize the individual propri- 
etorship as distinct from the proprietor. In the conduct 
of his business, therefore, he need but conform to the 
general rules of civil right. To go into detail concerning 
these rules, is without the pale of this text, as it would lead 
into the subject of civil law. A few brief paragraphs will 
suffice to bring out the more conspicuous features of this 
type, as well as its general limitations. 

Formation. — Anyone who has sufficient capital of his 
own, or the capacity to borrow it, can easily launch a 
business enterprise as an individual proprietor. All that 
he needs is an idea, the will and a sufficient command over 
capital to establish himself in business. There are no bind- 
ing contracts limiting his freedom of action; no special 
authority from the state is required, and he need consult 
no one. So long as he complies with the general provisions 
of the laW; he may conduct his business freely and un- 



THE INDIVIDUAI. PROPRIETORSHIP 41 

molested, either making for himself a profit or sustaining 
a loss. The process of formation is simply a matter of 
will, coupled with a capacity for its effective execution. In 
so far then, as the element of formation is concerned, there 
could be no greater advantage than that enjoyed under the 
individual proprietorship. 

Durability. — Since the law does not recognize a busi- 
ness conducted as an individual proprietorship as a legal 
entity distinct and apart from the person of the proprietor, 
it follows that the life limit of the proprietorship is coter- 
minous with that of the proprietor. By will or testament 
it is possible for the proprietor to transmit his business as 
a going concern to his heirs. Such an act, however, does 
not serve to continue the original organization in the eyes 
of the law, although the business might continue active as 
a factor in the industrial world. It would be looked 
upon as under the ownership, control and direction of a new 
entrepreneurial organization. During his life the proprie- 
tor is free at any time voluntarily to withdraw from busi- 
ness, either discontinuing it in part, or in its entirety, or by 
gift or sale to another. Only by due process of law may 
the business organization be terminated against the pro- 
prietor's will. Should the state require the property in- 
volved for some public purpose, it may be taken from the 
owner by right of eminent domain on tender of its fair 
market value by the state. Or should the business become a 
public nuisance, or otherwise injurious to the public wel- 
fare, the proprietor might also be forced to terminate his 
business by a decision of the proper courts. Also, if he 
should be legally adjudged insane, or legally incompetent, 
the courts would deprive him of the conduct of his business 
and place in his stead a trustee or administrator, who, for 
all business purposes, would then become the proprietor. 

Liability. — The liability that the individual proprietor 
assumes is unlimited. In case of failure of the business 



42 PERSONAL OWNERSHIP ORGANIZATIONS 

the creditors can look to all of the proprietor's property, 
whether employed in the business or not, for the satisfac- 
tion of their claims. Not only the assets of his business, 
but also his real estate, his home and all of his personal 
property, with the exception, of certain small exemptions 
provided for under the federal and state bankruptcy laws, 
may be sold to meet his business debts. He stakes all upon 
the chance of success or failure of the undertaking. 

The only compensating feature in connection with this 
unlimited liability lies in the relatively greater credit possi- 
bilities. The borrowing capacity of the individual pro- 
prietor is not so narrowly measured by his business assets, 
but rather by the sum total of all of his property. Capital, 
however, is not the only measure of a man's command 
over credit. His personal character and business ability 
are even more weighty determinants. But even when 
measured by these qualities, the credit advantage of the 
individual proprietorship type of organization is clearly 
recognized. But, on the other hand, some types of entre- 
preneurial organization afford an opportunity to limit the 
liability of an owner to a definite amount, thus diminishing 
the risk of loss. As long as this is not possible under the 
individual proprietorship, we may consider its unlimited 
liability as a distinct disadvantage from the business man's 
point of view. 

Direction and Control. — The power of direction and 
control in the individual proprietorship is vested solely in 
the person of the proprietor. In this particular he re- 
sembles closely the ruler of an absolute monarchy. This 
feature has its advantages, as well as its disadvantages. 
On the one hand, it presents a high degree of centraliza- 
tion of authority and responsibility in the proprietor. It 
enables him to act promptly in all business matters, to 
take immediate advantage of fluctuations in market condi- 
tions or of unanticipated opportunities that must be seized 



THE INDIVIDUAL PROPRIETORSHIP 43 

upon without a moment's loss of time. It is often just such 
things as these, that throw the weight in favor of success, 
when hesitancy or delay, such as is frequently unavoidable 
in associative organizations, might mean loss and at times 
even complete ruin. On the other hand, this indivisible 
ownership, coupled with an inherent singleness of control, 
tends to make it difficult to secure the full and hearty co- 
operation of assistants in the prosecution of the venture. 
In a small business, this is not such an important matter, 
for few assistants would be needed. But if the business is 
large, it will require the services of specialists in the field 
of purchasing, sales, manufacture, etc., according to its 
nature. To be sure, the proprietor can readily hire such 
specialists to help him in the management, but he cannot 
give them a true share in the business without destroying 
the individual proprietorship organization. This circum- 
stance tends to make it more difficult to secure their full 
cooperation toward the successful conduct of the business, 
in so far as it does not permit of the use of the entrepre- 
neurial incentive to tie them to the undertaking. This 
disadvantage may be overcome, in a measure, by the intro- 
duction of some system of profit sharing to add to the in- 
centive of the employee. Such schemes, however, are 
merely palliatives, in that they are useful only so long as 
the business makes a more or less regular profit, and they 
become worse than useless when profits fail. 

Capital limitations. — The statistics of manufactures, 
given in a following chapter,^ show clearly a very rapid 
growth in the size of the average manufacturing establish- 
ment. They indicate also a steady decline, in recent years, 
in the size and importance of such establishments operated 
under the individual proprietorship type of ownership 
organization. Among others, one reason for this — and 
by no means one of minor importance — is the fact that 

1 Chapter V, page 89. 



U PERSONAL OWNERSHIP ORGANIZATIONS 

the capital requirements of the typical manufacturing es- 
tablishment have grown to such magnitude as to be almost 
entirely out of reach of the average individual. By 1914 
it had reached $76;982, a sum such as a proprietor would 
find it quite difficult to procure in investable form, even 
though he added to his available capital such funds as he 
might be able to borrow. Furthermore, why should he take 
upon himself the risk of putting all of his capital into a 
single undertaking, when it is possible to participate in 
numerous undertakings operated under security-issuing or- 
ganizations? Also, money capital, once transformed into 
real capital in the form of manufacturing plant and equip- 
ment and commercial wares, besides being subject to con- 
tinual depreciation, is not again quickly reconverted into 
available money capital without some risk of loss. This 
risk is naturally much greater where money has been in- 
vested in a manufacturing plant, than where it is in mer- 
chandise. But if the same funds are applied to business 
purposes through the medium of security-issuing organiza- 
tions, the reconversion into money capital is quite generally 
assured through sale of the securities to others. These 
considerations make clear the limitations attendant upon 
the individual proprietorship. Therein lies, also, the reason 
for its decline in importance. 

Evaluation. — -By and large, the individual proprietor- 
ship is primarily an organization adapted to small enter- 
prises, where close personal supervision is possible. Enter- 
prises that require a comparatively large fixed investment, 
like manufacturing, because of the relatively greater risk 
involved due to the difficulty encountered in reconverting 
such investment into money, are, as a rule, not desirable 
undertakings under this form. Mercantile establishments, 
with their relatively more liquid assets, still afford an ex- 
cellent field for the proprietor. Retailing may be con- 
ducted on a small scale, as well as on a large one, ranging 



THE INDIVIDUAL PROPRIETORSHIP 45 

from the cross roads country store to the large department 
store of the city. The extensiveness of the business can be 
readily adapted to the capital that the prospective pro- 
prietor has available for investment. The business can 
be expanded as the capital grows. The profits, small 
though they may be, can easily be put back into the 
enterprise. This is not so easy in manufacturing under- 
takings, which often require duplication of much of the 
original equipment in order to increase the output. The 
growing size of manufacturing establishments, conse- 
quently, acts to exclude the individual proprietorship more 
and more from that field of mercantile enterprise where 
it is still by far the most important type of entrepre- 
neurial organization. 

The Participation Association. — Association of one or 
more individuals for the undertaking of business ventures 
is found to have been rather common among some ancient 
peoples. For the purpose of lightening somewhat the ex- 
cessive burden of risk inherent in the maritime commer- 
cial ventures of those days, there sprang up a type of btisi- 
ness ownership organization, whereby several men who pos- 
sessed spare funds could invest them without the excessive 
risk of loss attendant upon the individual proprietorship. 
A merchant, not wishing to risk all of his capital in fitting 
a ship and supplying a cargo for some foreign port, would 
enter into an agreement with others, under which the latter 
agreed to supply capital in money or wares, being liable 
only for the amount contributed, and foregoing any right 
in the management and direction of the undertaking. The 
merchant thus became a commandatary , and the contrib- 
utors his co-participants in the venture, to share in the 
profits or losses according to the terms of the agreement. 
The business was then conducted by the commandatary as 
if it were an individual proprietorship. 

Toward the latter days of the empire, the Romans also 



46 PERSONAL OWNERSHIP ORGANIZATIONS 

began to avail themselves of this type of organization. 
But it was not until after the fall of the Roman Empire 
and the rise of the power of the Church, that association 
for business purposes received its real impetus. The canons 
of the church forbade taking interest on loans. As a 
result of this ban, those who possessed spare funds were 
hard put to it to derive an income from them. To do so, 
it was necessary to participate in business. Under these 
conditions, there arose, during the eleventh century in 
Italy — where the revival of commerce first made its 
appearance — a type of business association called " com- 
menda " or " acommenda." This commenda was formed 
by secret agreement between the commandatary who was 
to conduct the business — usually a single venture — and 
one or more participants who furnished only funds or 
goods, and risked no more than their original contributions. 
In its dealings with third parties it operated as an indi- 
vidual proprietorship. On completion of the undertaking 
the profits, if any, were divided ratably on the basis of 
contributions or upon some plan agreed upon, and the asso- 
ciation was automatically dissolved. 

The further development of this type of organization, 
followed two general courses. On the one hand, it lost its 
temporary character and came to be used to conduct more 
or less permanent business establishments, developing later 
into a sort of partnership of the type employed by the 
great Italian banking firms of the Peruzzi and the de 
Medici families. On the other hand, its temporary char- 
acter, as well as the element of secret participation, be- 
came emphasized ; and it developed into the " participatio " 
which, with minor modifications, is the model upon which 
is patterned that class of organizations, which for lack 
of a better name, and in order to avoid technical inexacti- 
tudes, we shall designate by the general term participation 
associations. From Italy, this type of organization spread 



THE INDIVIDUAL PROPRIETORSHIP 47 

gradually throughout all Europe, where, during the middle 
ages, it appears to have been one of the chief vehicles of 
commerce. Today, it still is of sufficient importance to 
have several sections of the coromercial codes of con- 
tinental European and Latin countries devoted to it. 

Definition and Nature. — A participation association is 
a business organization, arising out of a secret contractual 
agreement between two or more natural persons, for the 
purpose of undertaking and concluding one or more single 
isolated business transactions, under such form and condi- 
tions, and with such division of interest, as may be agreed 
upon by the participants.- In Italy it is today called 
associazione in participazione , in France societe en partici- 
pation and in Germany Gelegenheitsgesellschaft. There is 
no exact counterpart for these organizations under English 
law. In the United States and the United Kingdom the 
limited partnership with a dormant or sleeping partner 
and the joint adventure, when applied to single ventures, 
most nearly resemble it. For the most part under English 
law this type is treated as if it were a partnership. ^ 

The true test of the existence of a participation asso- 
ciation lies in the requirement that its existence be un- 
known to those with whom business is done. The existence 
of the agreement, as« well as the terms thereof, must be 
known only to the participants; otherwise, it at once be- 
comes a partnership. The object or business purpose of 
the association, arises at the moment in which the parties 
make their agreement, and does not endure beyond the 

2 Article 48 of the French Commercial Code says *' Ces associa- 
tions sont relative a une ou pleusieurs operations de commerce, elles 
ont lieu pour les objects, dans la forme, avec les proportions d'in- 
teret et aux conditions convenues entre les participants." 

Article 266 of the German Commercial Code defines it as " die 
Vereinigung zu einzelnen Handelsgeschaften fur gemeinschaftHche 
Rechnung." 

* For these types see the following section on the partnership, 
pp. 63 and 69. 



48 PERSONAL OWNERSHIP ORGANIZATIONS 

time necessary to accomplish it. Thus, two men attending 
a horse sale, agree between themselves to purchase a cer- 
tain horse. One contributes his share of the purchase price 
as agreed upon, and the other, thereupon, negotiates the 
purchase. As long as the relationship arising out of the 
agreement between the two is unknown, the existence of a 
business association cannot be proven. The English com- 
mon law places the burden of proof of the existence of a 
partnership upon him who relies upon its existence, and 
consequently, it does not differentiate between this type 
and the partnership. In cases brought before the French 
courts of cassation, it has been held that the exploitation of 
a mine, the operation of a commission house, and furnish- 
ing of military supplies were, in the particular cases cited, 
held to be valid objects for participation associations.* 
They must be carefully distinguished from contracts, which 
closely resemble them, such as contracts for the extension 
of loans of capital, or of services containing provisions en- 
titling the lender to participate in the benefits. They are 
also frequently confused with underwriting syndicates, 
which fall more properly into the class of partnership, in 
that the identity of those interested in them, is usually 
known to the person on whose behalf they undertake the 
marketing of securities. ^ 

Property and Liability. — The property of the partici- 
pation association, consists of such tangible and intangible 
assets, as all participants agree to contribute. It may in- 
clude even commercial credit, provided that it is contrib- 
uted by the managing participant, in whom ownership 
of all property is held to be vested. At law all increase or 
loss in the value of the property, and even the profits, be- 
long to him. On completion of the object for which the 

4 Juliu — C, Valcanescou, Des societes commercial en participa^ 
lion. Paris, 1916. Pp. 27-28. 

6 For a description of underwriting syndicates see the following 
section on the partnership, page 69. 



THE INDIVIDUAL PROPRIETORSHIP 49 

association is formed, he is, of course, obliged to share the 
profits with the participating members, as contemplated in 
the agreement. As a corollary to this concept of ownership 
of property, it follows, that the managing participant as- 
sumes full and final liability for any debts or obligations 
that he may have incurred, while the other participants risk 
only what they have contributed. 

Management and Direction. — The management and 
direction of operations is in the hands of the managing 
participant. There may be several such, as in cases where 
goods are bought under a participation agreement and are 
allotted to the several participants, who thereupon separate 
and go into different parts of the community or country to 
sell their allotments, in accordance with the terms of agree- 
ment. Each thus has full management and direction of 
his assigned share in the execution of the contract as though 
he were an individual proprietor. The principal obligation 
of the managing participant is to render account of all 
transactions concluded under the terms of the agreement to 
his co-participants. Toward third parties, his obligations 
and rights are the same as those of the individual pro- 
prietor. 

Legal Status. — This form of business organization en- 
joys neither a legal nor a commercial entity. Suit of any 
kind, must be brought against the managing participant as 
an individual person, and if suit is to be brought on behalf 
of the association, it must be by him, in his own name only. 
The reason for this lies in the nature of the association 
agreement, which is secret, and does not contemplate any 
act which would in any way place an obligation upon any 
participant, other than the manager, toward third parties. 

As distinct from other forms of business association, this 
form has no social entity or right. An individual pro- 
prietorship is known by the name of the proprietor ; a part- 
nership, by the names of the partners, or by the firm name; 



50 PERSONAL OWNERSHIP ORGANIZATIONS 

and a corporation by its adopted name. They are busi- 
ness establishments, and as such have a social, even if not 
a legal, being. But the participation association has no 
name known to the business world, by which it may be 
identified. 

Dissolution. — The participation association may be 
dissolved by such causes, both voluntary and involuntary, 
as would have the same effect upon other organizations. 
Dissolution through bankruptcy, however, is somewhat 
restricted. The association, as such, cannot go into bank- 
ruptcy because it is not a social entity ; but the voluntary or 
involuntary bankruptcy of the managing participant may 
ensue if he cannot meet his obligations, in which case the 
association terminates. In any event, the pressure forcing 
bankruptcy, must come from without the organization. 
The co-participants have no power or right under law, to 
force bankruptcy upon the managing participant, or to 
demand the liquidation of the business. 

Limitations and Uses. — It can be seen that the very 
nature of the participation association, makes it unsatis- 
factory as an ownership organization under which to con- 
duct a permanent business establishment. But its ad- 
vantages and serviceability in undertakings that have as 
their object a single transaction are equally obvious. It is 
particularly useful to those seeking to conceal their 
identity, but desiring to participate in ventures entailing 
a high degree of risk,, and where success produces a large 
profit. The identity of such participants is not known; 
and moreover, the odium of speculation does not become 
associated with them when they participate in risky ven- 
tures. Of course, it in no way affords any protection to 
the managing participant, other than to relieve him of the 
liability that he would be obliged to assume if he undertook 
the venture alone and rounded out his capital requirements 
through loans. Its two chief uses, thus, are for conceal- 



THE INDIVIDUAL PROPRIETORSHIP 51 

ment of identity of participants in speculative ventures, 
and to enable entrepreneurs with insufficient capital to 
undertake ventures in business as managing participants. 

The extent to which use is made of this type of organi- 
zation in modern business, cannot be ascertained. Doubt- 
less it runs up into the hundreds of thousands daily. Most 
of these undertakings, to be sure, are small, but neverthe- 
less, they must make up a substantial portion of the annual 
business of those countries that recognize the participation 
association as a type of entrepreneurial organization. 

Significance. — This organization is important chiefly 
because it was the embryo out of which grew many of the 
modern forms of organization. It established the prin- 
ciple of contributions of capital from two or more persons 
for the purpose of engaging in a single business enterprise. 
The partnership with all of its modifications and the joint 
stock company may be traced back directly to it, while 
through these it has exercised a strong influence in shaping 
the general structure of the business corporation. 



CHAPTER IV 
THE PARTNERSHIP 

The ordinary partnership, or firm, is the simplest form of 
associative business organization that enjoys recognition 
in business circles as a unified and single establishment. 
As a modern business institution, its history may be traced 
back to the Italian commenda of the eleventh century. 
During the middle ages, it grew into the most important 
form of private business organization; and with slight 
modifications, was the form under which the great banks 
and big business of that period generally were conducted. 
It was later driven from its premier position by the need 
of securing greater quantities of capital for the conduct of 
the trading enterprises that sprang up following the period 
of discovery subsequent to 1492. It thus developed into 
the joint stock company. Today, it is no longer as im- 
portant in the field of big business, but still continues to 
enjoy some favor as a form of organization for the conduct 
of small businesses. 

Definition. — The partnership has been defined as " a 
relation existing, by virtue of a contract, express or im- 
plied, between persons carrying on a business owned in 
common, with a view of profit to be shared by them." ^ 

At law, the partnership is simply a definite relation be- 
tween certain persons, called partners. It is not a thing of 
itself, but merely a condition. Consequently it is not 
considered to be a single person at law, and all of its 
legal relations must be conducted and met by the individual 
partners. 

1 E. A. Gilmore, Handbook on the Law oj Partnership, 1911, p. 1. 

52 



THE PARTNERSHIP 53 

But very different is its standing in the business com- 
munity. The multiplicity and individuality of the co- 
partners are lost sight of, or at least minimized in im- 
portance. What the law does not recognize as a legal per- 
son, the business community recognizes as an economic 
business unit, equally as capable, and in many respects 
much more capable, of becoming the vehicle for conducting 
a business enterprise than if the individuals who compose 
it acted each for himself. Business must be conducted in 
the name of the partnership. 

Formation, — the contract. — Ordinarily, in this coun- 
try, as in England, partnerships are formed by contractual 
agreement under common law rules between the parties 
affected. In most other countries, such common law rules 
have been codified and incorporated into commercial codes. 
The common law applies equally in all of the states ^ of the 
union ; but in most of them the provisions relating to part- 
nership agreements have been assembled and by legisla- 
tive act issued as statutes. In addition to these statutes, 
many states have special statutes governing the formation 
and operation of limited, special and silent partnerships. 

The contract, or articles of co-partnership, that creates 
the organization, must be a legally valid contract; that is, 
the contracting parties (in this case the several partners) 
must be legally competent; the subject matter of the con- 
tract, and the purpose of the partnership must be reason- 
ably possible of accomplishment and also lawful, there must 
be a legal consideration and an observance of the proper 
formalities required by law. It is advisable, but not neces- 
sary, that the contract be reduced to writing. 

Ordinarily, every mature person is legally competent to 
enter into a partnership agreement. Felons, infants and 
lunatics, however, are debarred. Married women are com- 
petent only in such states where the statutes have so modi- 

2 An exception should be noted in the case of Louisiana. 



54 PERSONAL OWNERSHIP ORGANIZATIONS 

fied the common law as to declare them capable of con- 
tracting in their own name. A similar rule applies to 
corporations and firms; that is to say, they may become 
parties to partnership agreements only where specifically 
authorized by statute. For the most part, however, the 
ordinary partnership is formed by natural, mature persons. 

The consideration must be some obligation undertaken 
by the parties, which ordinarily they would not be obliged 
to assume. This, however, is a simple matter, for it has 
been generally accepted by the courts that a mutual agree- 
ment with respect to a common enterprise is sufficient 
consideration. 

A partnership agreement to carry on an unlawful enter- 
prise, such as is contrary to the laws of the land, or against 
the best interests of society, will not have the sanction 
of the courts; and the parties thereto would be denied the 
protection of the law. 

The formalities required by law in this country are 
generally quite simple. In most states the filing of a copy 
of the articles of co-partnership, or some other evidence 
of the creation of the organization, is required, while in 
others no formality, whatever, is prescribed. In Europe, 
under the commercial codes it is a common practice to re- 
quire all partnerships to give certain information con- 
cerning the nature of the business, the amount of capital, 
etc., and the name under which it is to operate to a gov- 
ernment bureau which inserts this information in the offi- 
cial commercial register for the benefit of the public. The 
latter plan is by far preferable, because this register may 
be introduced as evidence of the existence of a partnership; 
whereas, in the United States the burden of proving the ex- 
istence of a partnership rests upon him who relies upon 
its existence. Thus, if a person enters into a contract for 
the sale of goods to one who represents himself as purchas- 
ing for a firm and afterwards sues the partners on the con- 



THE PARTNERSHIP 55 

tract he must present evidence that a partnership really 
exists. 

At what precise time a partnership is created is a ques- 
tion that has frequently come before the courts for decision. 
On this point it is now the generally accepted rule, that the 
mere act of signing a contract, or entering into a partner- 
ship agreement, does not of itself create the partnership. 
The partners must actually begin doing business in ac- 
cordance with the terms of the contract. It is the legal 
intentions of the parties, clearly manifested by their acts, 
that determines whether a partnership exists, and not 
their secret intention. Thus, a single sale or purchase that 
would place a business obligation upon the partners would 
be sufficient. 

When the contract is set to writing, as is usually the case 
when the partnership business is a large one or the partners 
are numerous, the document is commonly called articles of 
co-partnership. Such articles of co-partnership ordinarily 
contain clauses on the following matters: 

(a) The names of the parties to the agreement. 

(b) The name under which the firm is to do business. 

(c) The amount and nature of the original contributions 
of capital, including real and personal property, money, 
etc., with which the partnership is to commence business, 
and the share thereof contributed by each partner. 

(d) The extent to which each partner shall be permitted 
to participate in the profits and losses and in the direction 
and management of the enterprise, and whether or not all 
shall be actively engaged. 

(e) Provisions relative to the distribution of assets in 
case of dissolution. 

(/) Provisions governing dissolution and arrangements, 
if any, for the continuance of the business in case of with- 
drawal, death or bankruptcy of any partner. 



56 PERSONAL OWNERSHIP ORGANIZATIONS 

(g) Frequently also a section prescribing the method of 
accounting and bookkeeping that is to be installed and 
maintained. 

(h) Lastly, the signatures of the parties to the agree- 
ment. 

Legal Nature and Legal Actions. — The partnership is 
not a legal entity, that is, it has no standing in law as a 
business unit and can neither sue nor be sued as a firm. The 
law recognizes only the contractual relationship between 
the persons directly parties thereto, but does not recognize 
such an agreement as in any way limiting the rights of 
others in their dealings with the individual partners. In 
so far, therefore, as non-partners are concerned their legal 
rights lie against the partners as individuals; and the 
partners themselves must exercise their legal rights as in- 
dividual persons before the courts. 

Since under the ordinary partnership agreement each 
partner becomes agent for the others in all business repre- 
sented to be on behalf of the firm and generally within the 
scope of the business, it follows that a third person, not 
a member of the firm, may seek redress on any such con- 
tract not solely against the partner with whom he entered 
into the transaction, but also against any of the other 
partners. Consequently when suit is brought against the 
firm on a contract it may be brought against any partner 
or against all of them ; but it cannot be brought against the 
firm in the firm's name. In practice such suits are com- 
monly directed against. the several partners individually 
and at the same time against all of them jointly. This 
applies also to other actions at law. In legal phraseology 
it is said that actions are by or against the partners " sev- 
erally and jointly." 

Rights and Obligations of Partners toward One 
Another. — The rights and obligations that ordinarily 
attach to partners are to participate: 



THE PARTNERSHIP 57 

(a) In the direction and management of the enterprise, 
and 

(b) In its assets, profits and losses. 

In case no special provision defining the rights and obli- 
gations of the several partners relative to the matters 
mentioned above is made in the contract creating the 
partnership, the common law rules or statutes, if any, are 
held to govern. But if any provision deviating from com- 
mon law practice and permissible under statutes is con- 
tained in the contract, such provision is held to take pre- 
cedence over the common law rules, as it is evidence of the 
intention of the parties on the point in question. The 
advisability of having the contract set to writing is at once 
apparent. Under a verbal contract disputes can arise 
which, with no evidence at hand to indicate just what the 
intention of the parties may have been, may easily lead to 
mutual distrust and final dissolution of the organization. 

(a) Participation in direction and management. — 
Under the general partnership form of organization each 
partner has the right to participate in the management and 
direction of the enterprise, unless he agrees to forego it. 
Having this right, it then becomes a duty that he owes to 
his co-partners to take an active part in the business, con- 
tributing the best of his skill, his services and business 
acumen toward the success of the venture. But in exer- 
cising his right of management and direction he must con- 
stantly bear in mind that his decisions and acts, and par- 
ticularly his business contracts with third parties do not 
bind himself alone, but also his co-partners. This wide 
latitude of freedom of contract accorded each partner 
under the law makes necessary not only a high standard of 
business morality coupled with mutual cooperation on the 
part of the partners, but also a healthy, mutual respect for 
the rights that each enjoys under the terms of the agree- 
ment. 



58 PERSONAL OWNERSHIP ORGANIZATIONS 

To require a joint conduct of the business might easily 
result in serious difficulties. Even where there are but two 
partners, agreement is sometimes hard to secure. But where 
there are five or six the chances of disagreement are con- 
siderably multiplied, and were it made obligatory upon the 
partners to come to a unanimous decision, such a rule 
could serve no purpose other than to obstruct the firm 
in its business dealings. In order that difficulties such as 
these may be avoided as much as possible, it is the com- 
mon law rule, where there are more than two members to 
an ordinary partnership, that the majority of such partners 
are empowered to carry a decision affecting the firm even 
though one or more dissent, unless the agreement requires 
a unanimous decision. In any case it is perhaps the better 
practice to appoint one or two of the partners as managers 
of the ordinary affairs of the business and to reserve gen- 
eral matters of policy for the consideration and substantial 
agreement of all. This, however, would not exclude the 
others from exercising their right of participation in the 
management and direction of the business unless it is so 
stipulated in the partnership agreement and has been 
generally accepted. 

In case of gross mismanagement on the part of a partner 
resulting in loss or injury to the other partners, the courts 
may be appealed to to exclude the culpable partner from 
exercising his managerial, powers. But this would be but a 
make-shift solution of such difficulties. The better prac- 
tice in such cases is to arrive at some equitable basis for the 
withdrawal of the culpable member. 

In all transactions on behalf of the firm each partner 
must always exercise his best judgment and employ as 
much care in his dealings as though he were working for 
himself alone. The law places upon him an obligation in 
the nature of a trust. If he violates this trust causing loss 
to the firm he can be required to make good such losses. 



THE PARTNERSHIP 59 

As agent of the other, each partner quite generally has 
the right and power to contract with outsiders on behalf 
of the firm and thus to bind his co-partners on the con- 
tract. But this right does not hold where the use of sealed 
instruments is required, nor generally where the transfer 
of real property or the fixed assets of the business is con- 
templated by one partner acting on his own authority. 

Each partner is also held to be liable for defamatory 
statements of one partner, or for fraud committed by such 
partner in course of a business transaction for the firm, 
even though his co-partners have no knowledge of such 
act. 

Each partner also has the right to inspect the books and 
accounts of the firm without restriction. 

(6) Right to participate in assets, profits and losses. — 
The business capital of the partnership consists of the 
aggregate property in terms of money contributed by the 
several members to establish or to continue the business. A 
distinction should be noted between the capital and the 
partnership property. The latter includes the capital and 
real and personal property, patents, copyrights, etc., origi- 
nally contributed or subsequently acquired and not yet 
distributed among the several partners. The contract 
determines what share of the capital each partner is to 
contribute. The law does not require that each member 
must make a capital contribution. While some may choose 
to do so, others may agree to contribute their services or 
skill in lieu of capital. The manner of making capital 
contributions is governed by the ordinary provisions of 
law relating to transfers of real and personal property. In 
the case of transfer of real property a sealed instrument is 
usually required. Such real property cannot be held in the 
firm name but only in the names of the partners as indi- 
viduals because it is necessary for a legal person to hold 
land or realty. 



60 PERSONAL OWNERSHIP ORGANIZATIONS 

Title to the property, with the exception of real estate, 
is vested in the partners jointly. Each partner's share en- 
titles him simply to a given portion of what remains after 
all of the firm's debts have been paid. The extent to 
which he is to share in the property on dissolution is 
usually based on his original capital contribution and 
should appear on the books of the firm. He is not entitled 
to a partition or division of the property in kind. Division 
in kind is indeed sometimes quite impossible, as where one 
partner of a firm that owns a single ship withdraws. He 
could quite obviously not be permitted to take away part 
of a ship, but must be content with money or such detach- 
able property as all might agree upon. Only upon final 
dissolution of the firm does a partner receive the full 
amount of his share in the assets, either with his ratable 
share of profit added on or with the losses deducted. 

No partner may withdraw from the partnership his 
share of the property or assets, nor may he speculate with 
the firm's property nor mortgage its real estate or generally 
sell its property not ordinarily held for sale without the 
consent of the other partners. The same rule applies also 
to creditors; they may not withdraw any particular share 
of the property to satisfy their claim. Upon dissolution 
of the partnership, however, each partner is held to have 
power to sell the assets in order to wind up the affairs of 
the firm. 

Sale of the vendible property of the business, that is to 
say of such property as is held and offered for sale by the 
firm, may be effected by any or all of the partners or by 
someone authorized to represent them. The non-vendible 
property, including real estate, and the more permanent 
business assets requires the common agreement of all 
partners for its disposal either in whole or in part or for 
the sale of such share as one or more partners may have 
in the firm. But in no case may even all of the partners 



THE PARTNERSHIP 61 

agree to dispose of the firm's property in such a way as 
to hinder, delay or defraud the creditors of the firm. 

Each partner's share in the profits and losses may be 
fixed by the terms of the agreement. In so far as the 
partners themselves are concerned these terms would gov- 
ern, but this does not work to limit the liability assumed 
by each partner for credit extended by third parties. In 
other words, the terms of the agreement place no restric- 
tion upon the obligation of co-partners toward third 
parties. 

Obligations of Partners toward Third Parties. — It is 
particularly in the obligation of the partners toward third 
parties and in the rights of such third parties against the 
partners and the business that the peculiar character of 
the partnership form of entrepreneurial organization is 
most clearly brought out. 

With the beginning of business relations with outside 
parties the partnership becomes, for all legal and com- 
mercial purposes an established business organization. We 
have seen that by virtue of law each partner is the agent 
of the others in all transactions undertaken by him with 
third parties, if such transactions are on behalf of the firm, 
and that the burden of proof of the existence of a partner- 
ship rests upon him who relies upon its existence. A third 
party, therefore, is not required by law to prove the exist- 
ence of a partnership in order to recover on a contract 
entered into with one of the partners, for he may hold 
him responsible as an individual acting on his own behalf; 
but if he desires to hold each partner responsible as prin- 
cipal of the one acting as agent, he must be able to prove 
the existence of the partnership. The importance of this 
distinction is clearly brought out by a consideration of 
partnership liability. 

.(a) Liability of partners for debts. — To third parties, 
on all contracts entered into on behalf of the firm, the part- 



62 PERSONAL OWNERSHIP ORGANIZATIONS 

ners are liable jointly and severally. Every debt that is 
incurred on behalf of the partnership is at the same time 
the debt of all jointly and of each privately, encumbering 
not only the assets directly employed in the business, but, 
if these do not suffice, also the private fortunes of the 
several partners. 

This liability attaching to each partner individually, 
follows him even though he has withdrawn from the firm. 
If the creditor is actually given notice of the withdrawal 
of a partner upon a certain date, he may hold that partner 
liable only on contracts entered into prior to his with- 
drawal, until such time when all of his claims have been 
satisfied. If, however, the partner withdraws without giv- 
ing actual notice to the creditor, the latter may still hold 
the former liable on contracts entered into on behalf of 
the firm during such period of time as he remained ignorant 
of the partner's withdrawal. 

(b) Creditor's satisfaction. — Every creditor may 
choose how he shall satisfy his claims. He may sue either 
as a creditor of the firm, or as a creditor of a partner. 
If he sues as creditor qf the firm, suing the partners jointly 
he can recover, ordinarily, only to the amount of the 
partnership's assets; whereas, if he sues as creditor of each 
partner, suing them severally, he can recover not only out 
of the assets of the business, but if they are insufficient to 
satisfy his judgment, also out of the private fortunes of the 
individual partners. Suits by creditors against partners 
are usually brought against them jointly and severally. A 
judgment secured in this way would first exhaust the assets 
directly employed in the business before it would draw 
upon the partners' private fortunes. 

(c) Alteration of the partnership agreement. — Since the 
partnership is the result of a contract between the several 
partners, it follows that the partners may by common 
consent change that relationship at will. ' In so doing, how- 



THE PARTNERSHIP 63 

ever, they must guard against adopting alteration that 
will affect adversely the rights of third parties. The right 
of creditors in case of the withdrawal of a partner has al- 
ready been discussed. It has also been pointed out that 
the partners may not dispose of the partnership property 
without first satisfying the creditors. Substitution of one 
partner by another person may also be effected, provided 
the interests of the third parties are safeguarded. And 
even in case of dissolution and discontinuance of the busi- 
ness must proper care be taken to protect the rights of the 
firm's creditors. 

Classification of Partners. — Partners are commonly 
classified on the basis of some special advantage or obli- 
gation that is extended them under the partnership agree- 
ment into general, special, ostensible, secret, silent, or 
dormant partners. 

General partners are such as have unlimited liability and 
full voice in the management and direction of the enter- 
prise. 

Special partners are those whose liability for debts of the 
firm has been limited. Creditors must usually be advised 
what partners are special and to what extent they enjoy 
limited liability. 

Ostensible partners are such whose connection with the 
firm is openly avowed and relied upon by creditors, al- 
though they are parties to the agreement by inference only. 
They may be held liable by creditors if they do not specifi- 
cally deny having any connection with the firm. 

Secret partners are those whose connection with the firm 
is concealed or at least not made public. They are usually 
also silent. 

Silent partners have no voice in the management but 
share in the profits and losses. 

Dormant partners (also called " sleeping ") are those in 
whom the characteristics of secret and silent partners are 



64 PERSONAL OWNERSHIP ORGANIZATIONS 

combined. Under English jurisprudence, a partnership 
with one general and one or more dormant partners, forms 
the type of business organization resembling most closely 
the participation associations described in the preceding 
section. Dormant, as also secret and ostensible partners, 
are not very common. 

Sphere of Activity. — As the partnership rests at bottom 
upon the principles of common law which are of general 
applicability in the United States, the members of any such 
partnership will enjoy generally the same privileges and 
obligations in any of the several states, except where cer- 
tain statutory provisions may have made minor changes. 
Under common law the partners also are by no means 
restricted from extending or contracting their sphere of ac- 
tivity, provided that they confine their business to a law- 
ful enterprise. By the mere formality of changing the 
terms of the agreement they may widen or narrow the pur- 
pose of their business enterprise, or change its nature com- 
pletely, always, of course, exercising due care to protect the 
interests of their creditors. 

Dissolution or Termination of the Parnership. — Volun- 
tary dissolution of the partnership may be effected by 
mutual consent of the partners under the terms of the 
agreement creating it and under the conditions outlined in 
the preceding paragraph. The withdrawal of one or more 
partners is held to terminate the agreement but need not 
necessarily work to effect a general liquidation and dis- 
continuance of the enterprise. Provision may be made in 
the agreement for such contingencies, which will preserve 
the commercial entity of the business; but if no such pro- 
vision is made, the withdrawing partners can insist upon 
liquidation of the assets. 

Dissolution by operation of law ordinarily results from 
the following causes: 

(a) Death or withdrawal of a partner 



THE PARTNERSHIP 65 

(6) Bankruptcy of a partner or of the firm 

(c) Marriage of a female partner 

(d) Where the business has become illegal 

(e) Alteration of the firm's property or interest 

(/) Declaration of war between countries when the 
subjects of each are members of the firm. 

In brief, any act or event that goes to the essence of the 
contract creating the partnership, is held to work its disso- 
lution. But here also, as in the preceding case, provision 
may often be made for the continuance of the business 
under a revised agreement. In either case, however, the 
original partnership would be dead; revision of the agree- 
ment resulting merely in the creation of a new partnership. 

In addition to the two methods of dissolution given, it 
frequently happens that the courts are appealed to to 
terminate the partnership relation by decree or annulment, 
as for example where there is a practical impossibility of 
success, an incapacity of the parties or a gross misconduct 
on the part of a partner. 

Termination of the partnership, naturally, entails a gen- 
eral winding up of the firm's affairs. Creditors must be 
satisfied and the rest of the assets distributed among the 
partners according to the terms of this agreement. Under 
provision of law the satisfaction of claims against the part- 
nership assets must take the following order: 

(a) Payment of all debts and obligations of third parties 

(b) Repayment of advances made by partners to the 
firm 

(c) Each partner's contributions of capital to the firm 

(d) Whatever surplus remains is distributed according 
to the partnership agreement. 

Classification and Types of Partnerships. — Partner- 
ships may be classified according to the nature of the 
business to be undertaken, the extent to which business 
operations shall be carried, and the nature of association. 



66 PERSONAL OWNERSHIP ORGANIZATIONS 

(a) Nature of the business. — Under this head partner- 
ships fall into two general classes, trading and non-trading. 
A trading partnership is one in which the business transac- 
tions include the general dealing in commodities, as by- 
buying and selling for profit. Non-trading partnerships are 
those formed for the joint pursuit of some employment or 
occupation such as the practice of law or medicine. It is 
the former that have been under consideration in this 
chapter. The non-trading partnerships follow quite gen- 
erally the principles laid down, but in many instances with 
minor variations. 

(6) Extent of operations. — Under this head partner- 
ships may be classed as universal, general or special. Uni- 
versal partnerships are those in which the partners agree 
to combine all of their property, skill, labor, etc., of every 
description in the enterprise. They are practically never 
used. In the general partnership the partners agree to 
join in all transactions of a particular class of more or less 
permanency, such as a partnership in banking, or merchan- 
dising. They make up probably the great bulk of trading 
partnerships. Special partnerships are association agree- 
ments with respect to a single venture only, such as a 
single mercantile transaction or the charter of a vessel for 
a single trip. They are quite common, but because of their 
temporary nature are not recognized as established business 
enterprises, being rather in the nature of joint adventures 
on the one hand, and participation associations on the 
other. 

(c) Nature of association. — This classification is based 
upon variations in the principles governing the liability of 
partners, power to transfer their interest, power of with- 
drawal and the like. Thus classified, we find ordinary 
partnerships, limited partnerships, partnership associations, 
joint stock companies, mining partnerships and sub-part- 
nerships. 



THE PARTNERSHIP 67 

1. Ordinary partnerships are those in which the partners 
and third parties are governed by the principles laid down 
as general rules in the preceding paragraphs of this section. 
They rest upon the rules of common law and accepted prac- 
tice. In the French commercial code they are called 
societes en nom collectif and in the German, ofjene Handels- 
gesellschaft. 

2. Limited partnerships differ from the general type, 
heretofore described, in that the liability of one or more of 
the partners is limited to the sum of their original capital 
contributions, but at least pne partner must be a general 
partner of unlimited liability. The general partner must be 
actively engaged in the management and direction of the 
business, but no such rule applies generally to the limited 
partners. This type is possible of adoption in the United 
States only where statutes make provision for it. In 
Louisiana, under the modified French code, they are quite 
common. While nearly all states make some provision 
for them they do not enjoy great popularity because of 
the relative ease with which a corporation may be formed. 
Ordinarily under the laws of these states neither the limited 
nor the general partners may freely transfer their interest 
in the business to another- The French code treats them 
under the name of societes en commandite and the Ger- 
man under Kommanditgesellshaft. 

3. Partnership associations. — In Pennsylvania and 
Michigan the statutes provide for the organization of part- 
nership associations. Under these laws all of the partners 
have limited liability, and the shares of interest are usually 
represented by stock certificates. These stock certificates, 
however, unlike securities, are not freely transferable. A 
person acquiring the same must first be elected to member- 
ship, before being entitled to full participation in the busi- 
ness. If he fails of election the remaining members are 
empowered to, and must purchase the share of the peti- 



68 PERSONAL OWNERSHIP ORGANIZATIONS 

tioner, either at a price agreed upon, or in default of such 
agreement, at a price set by an appraiser appointed by the 
court. As a prerequisite to organization of partnership 
associations, the articles of association must be approved 
by the proper state official, and a franchise tax, similar to 
that required of a corporation, must be paid. The word 
" limited " must also appear in the name of the association. 
The term of life is usually limited to a period of twenty 
years with privilege of renewal. Although quite service- 
able in the state authorizing them, they are unsatisfactory 
for business in other states because they may do business 
there only by sufferance and not by right, as a consequence 
of which the limited liability feature may not be recognized, 
and they must be treated as ordinary partnerships before 
the law. Because of their close resemblance to corpora- 
tions they are frequently called quasi-corporations. 

4. Joint stock companies are primarily partnerships 
whose capital is divided into freely transferable shares 
represented by stock certificates of the security type. They 
are reserved for further treatment under a following sec- 
tion devoted to securities-issuing organizations. 

5. Mining partnerships are modified forms of the general 
partnership that have arisen out of customary practices 
that arose in the early mining districts for the exploitation 
of mining claims in common by two or more persons. 
There is usually no fixed agreement, the partners simply 
working in common and sharing equally in the profits. 
Substitution of partners may be effected at will, without 
dissolving the partnership. For this reason also, the death 
of any partner does not work the dissolution of the firm, 
provided there are more than two members. 

6. Sub -partnerships arise where one partner enters into 
an agreement with a third person to share as partner in 
his part of the profits and losses of the original partner- 
ship. They are not very common. 



THE PARTNERSHIP 69 

7. Joint adventures are partnership organizations that 
have for their purpose the conduct and conclusion of a 
single business venture. The terms of the agreement de- 
termine the nature of the venture and the number, rights, 
obligations and privileges of the members. In all of these 
particulars they resemble very closely the participation 
association; but on the question of liability of members 
toward third parties they differ from it. The liability of 
CO- adventurers is equal, and as to third parties is un- 
limited, being entirely independent of the amount ad- 
vanced. Their duration is limited to such a period of time 
as is necessary to complete the contemplated transaction. 

8. Underwriting syndicates are a type of partnership 
that have as their object a single undertaking, namely, 
of assuring to the issuing organization a market for a defi- 
nite amount of securities, at a predetermined price per 
share. Their work is of a financial character, in so far 
as they confine their operations quite largely to the con- 
version of securities capital into money capital, and make 
their profit or loss out of such transactions. They render 
invaluable service to large corporations and combinations 
by assuring them of sufficient funds to carry through their 
proposed undertakings.^ Concerning the nature of the lia- 
bility of members of such syndicates, one authority says: 
" The members of a syndicate would undoubtedly be held 
liable to third parties as partners if the enterprise became 
absolutely insolvent. As most syndicates are formed for 
financial investments or under writings, and either involve 
no obligation in excess of the amounts contributed, or, if 
otherwise, have well-defined and well-understood liability 
as to the syndicate transactions, and as the members of 
such syndicates are usually men or concerns of wealth and 
standing, the question of partnership liability rarely arises. 

2 A brief description of the procedure of the underwriting opera- 
tion will be found in W. H, Lough's Corporation Finance. 



70 PERSONAL OWNERSHIP ORGANIZATIONS 

If there were any danger of such liability it could probably 
be avoided by organization under a trust with express ex- 
clusion or individual liability." * 

Extent of Use. — Although no reliable information is 
available to show the number of partnerships actively en- 
gaged in business in this country, nevertheless sufficient 
statistics have been published to indicate the relative im- 
portance of this type of ownership as a business vehicle, 
and also to show, in a general way, in what fields of busi- 
ness it is most frequently employed. 

The great obstacle standing in the way of ascertaining 
the number of partnerships compared with other types of 
entrepreneurial organization, is the intangible character 
of those types, which in continental Europe would more 
properly be classed as participation associations, but here 
are at law, partnerships. The temporary character of these 
organizations, having as their object only a single business 
venture, makes enumeration impossible, except in such 
fields of enterprise as manufacturing, where a more perma- 
nent establishment is the rule. Figures published in the 
Statistical Abstract of the United States give the number of 
manufacturing establishments operated as partnerships at 
about 62,600 in 1899, 54,000 in 1909 and 51,000 in 1914. 
The percentage of all manufacturing establishments that 
these made up was 22.9 in 1899, 20.2 in 1909 and 18.2 in 
1914. But the importance of the partnership in this in- 
dustrial field is overemphasized when number alone is 
taken into account. The value of the product of the above 
manufacturing establishments conducted as partnerships 
was only 19.0 per cent in 1899, 10.6 per cent in 1909 and 
only about 8.2 per cent in 1914. A glance at the table 
(page 88) showing sources of income from three types 
of business organization for 1917 is also instructive. Only 

* Conyngton, Thos,, Corporate Organization and Management, 
p. 519. 



THE PARTNERSfflP 71 

13.7 per cent of the total net income from individual busi- 
ness, from partnerships and from dividends of corpora- 
tions is credited to partnerships. Considerable variation 
in the proportion of income from these three sources derived 
from partnerships is also shown. In the agricultural states 
it is relatively low, while in the industrial states it tends 
to be much higher. Thus, in Iowa it is 6.9 per cent while 
in New York it is 19.1 per cent. 

Several conclusions may be drawn from these statistics. 
First, that the partnership form of ownership organization 
is rapidly losing its importance in business, and second, 
that there must be certain inherent and contributing causes 
for this decline. 

Limitation of the Partnership. — Among the causes for 
the decline of the partnership are certain of its inherent 
characteristics such as the following: 

(a) Unlimited liability, 

i'b) Numerous uncontrollable events that affect its dis- 
solution, 

(c) Obstacles in the way of free transfer by partners of 
their interest in the business, 

(d) Difficulty of securing harmony and unity of purpose 
in management, and 

(e) Natural limitation on expansion because of limited 
source of capital. 

The last mentioned characteristic was not of any great 
consequence until the period of big business set in. But 
with its advent came an ever increasing demand for. capi- 
tal to be used in expanding business enterprises in the 
financial, transportation, mining, trade and manufacturing 
fields. To meet such growing capital requirements de- 
mands great elasticity in the ownership organization. 
This the partnership does not possess, and in consequence, 
it gave way to the more flexible' and more serviceable 
corporation. 



72 PERSONAL OWNERSHIP ORGANIZATIONS 

But the partnership also has several desirable qualities 
which are very serviceable in business enterprise. Among 
these should be mentioned (a) the ease with which it may 
be formed, (b) absence of restrictions on its sphere of ac- 
tivity, thus permitting of change from one type of business 
to another or of expansion into other fields more or less at 
will, (c) relative freedom from state regulation and con- 
trol, and (d) the promptness with which it can act. 
Through attempts to conserve the advantages and to avoid 
the limitations, various modifications of the partnership 
have from time to time been made. Out of such attempts 
arose the joint stock company, the partnership association 
and several of the types of limited partnership above 
described. Under these modified forms it has been possible 
to employ it to operate very large enterprises. Thus, the 
Carnegie Steel Company was at one time operated as a 
partnership and the great " Iron Master " is reported to 
have said that, while operating under this form his concern 
could play all around his competitors. Most of these modi- 
fications follow the principle of making the partnership 
more durable by eliminating most of the causes of dis- 
solution, and by providing for greater latitude in the trans- 
ferability of interest. But even with these alterations it 
still lacks much of attaining the serviceability of the corpo- 
ration. A German example of this is reported by Robert 
Liefmann.^ It appears that many of the coal mines 
in the Ruhr district, early in the last century, were 
operated under a form of partnership called Teilhabershaft, 
which is characterized by permanent duration and free 
transferability, either in whole or in part, of such interest 
as a shareholder might possess. Even as late as 1865, by 
the splitting up of the original shares through sale, inherit- 
ance and transfer, a single share in the ownership of this 

^ R. Liefmann, Beteiligungs und Finanzierungsgesellschaften, Jena, 
1913. Pp. 40, 41. 



THE PARTNERSHIP 73 

concern was represented by a fraction whose numerator 
consisted of 47 digits and the denominator of 48. Others 
with 35, 30, and 26 digits in the numerator are also men- 
tioned. One can imagine the poor bookkeeper, as he sweats 
over the distribution of net earnings to the holders of such 
shares. Others, again, prohibited the splitting up of shares, 
but permitted unrestricted transfers. This plan also had its 
disadvantages; for, as the business grew the shares became 
more valuable. Single shares of this type are reported to 
have attained a money value of about $14,000, which, of 
itself, would make it difficult to sell them. 

After all, it appears that nothing short of a full use of 
securities as instruments of organization to represent the 
participants' interest in the business can provide an owner- 
ship form under which a modern large-scale business enter- 
prise can be satisfactorily set up and operated. This the 
partnership does not offer. In fact, none of the personal 
ownership organizations is adaptable to big business under- 
takings ; but for small enterprises in manufacture, trade, the 
professions, agriculture and finance they offer many ad- 
vantages, and there they find their greatest usefulness. 



PART III 

Secubities-Issding Organizations 



CHAPTER V 
THE NATURE OF SECURITIES 

The types of entrepreneurial or ownership organization 
thus far considered, all have one outstanding character- 
istic — they are inseparable from the person of the owner. 
Any person enjoying the relationship of owner, or entrepre- 
neur, in any one of them can lay claim, either in whole or 
in part, to the assets of the business; and furthermore, 
he can withdraw, dispose of, or hypothecate his share at 
will at any time. But this fact should be noted: In with- 
drawing from the business, he spontaneously causes the 
dissolution of the organization. This must be so, because, 
at law, the ownership of the assets is vested directly in 
the person of the proprietor or partner, and the share thereof 
that he owns goes with him when he severs his connection 
with the business. Of course, he may agree to accept the 
money equivalent in lieu of the part of the business plant 
and equipment that belongs to him; but the fact that he 
has a legal right to withdraw his share of the assets of the 
business cannot be overlooked. 'The personal element in 
these organizations, therefore, is predominant. It is this 
characteristic that distinguishes them most clearly from 
the securities-issuing or impersonal types, represented by the 
corporation, the joint stock company, and the securities- 
issuing trust. 

Theory of Impersonal Organization. — The theory of 
impersonal organization is more easily understood if we 
have clearly in mind the purpose that it seeks to accomplish. 
Let us assume, for example, that we have before us a small 
steel plant operating under a personal ownership organi- 

77 



78 SECURITIES-ISSUING ORGANIZATIONS 

zation of the partnership type. Legally this organization is 
a condition, an agreement between persons, and not a 
thing or an ownership unit. The several partners have 
merely agreed to combine their personally owned plants 
and equipment for a business purpose. One of them now 
desires to withdraw. 

There are four ways by which this may be accomplished. 
In the first place, the withdrawing partner would probably 
make an offer to the remaining partners to buy his share. 
If they are in a position to accept such an offer and act 
upon it, the result of the transaction would be to force 
them, perhaps unwillingly, to invest more capital in the 
business than they had originally contemplated. If, how- 
ever, they do not have available sufficient funds to buy 
him out, he may adopt the second plan, namely, to sell 
his share in the business to a third person. This places 
upon him the burden of finding a buyer who is willing to 
take his place in the partnership — by no means an easy 
task. It would require a complete survey of the plant and 
equipment to ascertain its condition and value, a careful in- 
spection of the books and accounts to determine net assets, 
profits, etc., and the drafting of a bill of sale conveying 
personal property and perhaps also real estate — in all, a 
mass of laborious details not only time consuming but also 
costly. Upon the other partners would then fall the obli- 
gation of reconstituting the organization in order to take 
in the purchaser who may be a total stranger to them, 
and, in addition, might prove to be incompatible. If no 
one can be found to buy the share of the withdrawing part- 
ner, he may propose the third plan — that of actually tak- 
ing away from partnership control such part of the physi- 
cal property, cash and accounts as may be agreed upon. 
This course naturally destroys the ownership entity of the 
plant. If all parties decide to continue to operate, we then 
have two distinct business establishments, neither legally 



THE NATUKE OF SECURITIES 79 

dependent upon, nor in any wise controlled by the other, 
except in so far as may be dictated by economic expediency 
such as the necessity for maintainirfg the economic unity of 
the plant. Aside from the difficulty of arriving at an 
equitable basis for the division of the property, this method 
of withdrawal obviously has another equally serious draw- 
back. If it so happens that one part of the plant cannot 
operate without the other, and each part is under the con- 
trol and ownership of a separate and distinct business 
organization, the difficulties arising from an attempt to op- 
erate the plant under such conditions would doubtless prove 
insurmountable. There would, then, remain only one 
other course, namely, to liquidate the whole business, sell 
it intact, as a going concern, or piecemeal, at a great sacri- 
fice. Thus, under such conditions, the partners might all 
be forced, willingly or unwillingly, to discontinue the 
business. 

The rigidity of investments, particularly in enterprises of 
this character, is well indicated in the above example. Cap- 
ital once put into a business plant and equipment, except 
under favorable conditions resulting from a phenomenal 
rise in prices, cannot again be fully recovered by the sale 
of the original equipment. That must be operated at a 
profit, which, over a period of years, will be sufficient to 
replace the equipment as it wears out. Otherwise it is an 
economic loss falling most heavily upon the individual who 
owns the plant. This rigidity is greatly magnified by the 
many obstacles that stand in the way of the free sale and 
transfer by an owner of his interest in such an establish- 
ment, wherever it is operated under the personal ownership 
type of organization. It is also to be noted that these diflS- 
culties grow steadily greater with the size of the establish- 
ment. While one may find ten buyers for a share in a 
small business, considerable difficulty might be encountered 
in finding one, if it is a large business. Thus, the number 



80 SECURITIES-ISSUING ORGANIZATIONS 

of persons who might be looked to as possible investors in 
personally owned establishments, is ordinarily quite small. 
They can draw their funds at best, from perhaps a score of 
persons who must be more or less closely acquainted, but 
the gateways that tap the vast reservoir of national capital 
surplus, closely held by millions of persons, are uncom- 
promisingly closed against them. 

Securities are a class of commercial paper. The term 
pose to be attained by the impersonal types of entrepreneu- 
rial organizations may, then, be said to be twofold, first to 
facilitate the transferability of the ownership interest in 
business, and secondly, to make available to business enter- 
prises the capital surplus of the world. The instruments that 
they employ to accomplish this purpose are securities. 

Securities are a class of commercial paper. The term 
''commercial paper" comprises all credit instruments, other 
than currency, that give the bona-fide holder a claim on cap- 
ital. These instruments fall chiefly into three general 
classes, namely, (1) money paper, more commonly called 
negotiable instruments, which include checks, drafts and 
bills of exchange, notes and the like, (2) commodity paper, 
such as warehouse receipts, bills of lading, etc., and (3) in- 
vestment paper, including mortgages, bonds, stock and 
trust certificates, etc. The distinction, as based upon 
economic principles, lies in the fact that the claim of a 
holder of money paper is a claim on a definite sum of money 
to be paid at a definite time, while that of the holder of 
investment paper is a direct claim upon the income from a 
definitely designated accumulation of capital, and a de- 
ferred claim upon such capital itself. 

Money Paper. — The chief use of money paper is to 
facilitate the transfer of, and dealing in money, by effect- 
ing a great economy in the use of real money, in that it 
becomes, as it were, a substitute for the latter in most trade 
transactions. Checks, drafts and personal notes, etc., 



THE NATURE OF SECURITIES 81 

arose and developed under an industrial system whose out- 
standing characteristic was personal ownership of the 
business establishment. We find some forms of this type 
of instrument were in use long before the dawn of the 
Christian era in Phoenicia and Babylon. They are service- 
able alike to any system of ownership organization that is 
based upon private property. But this should be noted: 
They do not influence, to any measurable degree, the dis- 
tribution of income, and consequently they work no notice- 
able change in industrial organization, neither do they 
establish any new principle of organization of business 
ownership. 

Commodity Paper. — This class of commercial paper 
represents merely the ownership interest in the wares of 
commerce that are stored in warehouses or are in course 
of transportation by a common carrier. They, in no way, 
are instruments of ownership organization. 

Investment Paper. — Money paper, it is at once seen, 
represents in no way a claim upon the income of capital. 
This is primarily what distinguishes it from investment 
paper. Through the use of the latter it becomes possible so 
to construct an ownership organization in business, that 
those who have invested money in it may more or less 
freely withdraw from the undertaking without affecting 
the entity of the organization. The business itself, through 
the use of these instruments, can have an economic, as well 
as a legal entity, separate and apart from the person or 
persons w^ho invest in it. In the more highly developed 
forms this principle may be carried so far that any owner, 
or investor, risks in the undertaking no more than what he 
agrees to contribute ; and he is free at any time to transfer 
his share in the business to whomever he may see fit, re- 
gardless of whether this may please or displease other in- 
vestors or owners in the same business. Also, if any man 
does not wish to risk all of his capital in a single enterprise, 



82 SECURITIES-ISSUING ORGANIZATIONS 

he may purchase the investment paper of a number of busi- 
ness establishments, and by this means iron out the in- 
equalities of return from the various enterprises in which he 
is interested, in such a way as to bring him a fairly well 
assured and dependable income, even though he may give no 
attention and devote no time, whatever, to the affairs of 
the undertakings in which he is financially interested. 
Investment paper, then, does influence the distribution of 
income, and it may effect a change in the ownership organi- 
zation. 

However, not all investment paper affords the same free- 
dom and flexibility of organization above indicated. The 
impersonal status of the organization, may be made little 
short of absolute through the use of certain types of invest- 
ment paper,- while others will produce little appreciable 
change in the personal ownership of the organization. 
Some types of investment papers may be freely transferred, 
sold and traded in, with scarcely any formality attendant 
upon such transactions; while others require more formal- 
ity and special bargaining on the price of each piece sold. 
Again, we find that certain kinds represent a share in the 
ownership of the enterprise, while others represent a cred- 
itor's interest in the business with the principal secured 
by its assets. The following table will aid in understand- 
ing the general classification of investment papers that will 
be employed in this text. 



THE NATURE OF SECURITIES 



83 





Classified as representing 


Investment paper 


(a) Ownership in 
the business 


{b) Creditor's interest 
in the business 


Classified as to transferabil- 
ity: 

1. Non-securities (re- 
stricted) 

2. Securities (unrestrict- 
ed) 


Shares ^ 

f Stocks 

\ Trust certificates 


Mortgages 

f Bonds 
\ Notes 



1 EngUsh practice reverses the order, considering stocks as non- 
securities. 



Ownership Paper. — Each instrument of the ownership 
group represents a fractional part of the business. This 
may be expressed in terms of money, for instance, by 
arbitrarily assigning a fixed sum as the capital of the busi- 
ness for this purpose, and then making each share a frac- 
tional part of this sum ; or no money value may be employed 
at all, in which case the capital is simply stated as s*o 
many shares. In other words, each instrument may give 
the holder a one-thousandth part of the ownership interest 
in the business without the assignment of a value to it, or 
it may give him a one-thousandth part of an ownership cap- 
ital set at $100,000, in which case each unit would have an 
assumed value of $100. Such instruments, whether with or 
without an assigned value, entitle the holder to share in 
the net income of the business and usually to a voice in its 
control and direction and to a share in the assets in case of 
dissolution, and place upon him the ownership obligation of 
risk, or liability of loss which may or may not be limited. 
Another important characteristic of this group is their per- 
manence. Ordinarily once having been issued they are not 
redeemable or revokable, but remain a standing obligation 



84 SECURITIES-ISSUING ORGANIZATIONS 

against the business as long as the organization that oper- 
ates it endures. 

Creditor Paper. — The instruments of group {b) are like 
those of the group just described in so far as they are based 
on a claim on income and assets. But even in this, as well 
as in other respects, they exhibit clearly recognizable 
differences. In the first place, they represent a money 
loan, and consequently each unit is a fractional part of a 
sum of money that is due and payable at a definite time. 
The claim on income is usually limited to a fixed per cent 
and ordinarily, does not fluctuate with the varying prosper- 
ity of the business. As the creditors of the business must be 
satisfied before there is a net profit to be distributed to the 
owners, this claim on income attached to creditors' invest- 
ment paper takes precedence over that of ownership paper. 
The creditor group, moreover, ordinarily gives to the holder 
no right to a voice in the management of the business so 
long as the claim on income is satisfied. The claim on 
assets, that it carries with it, is in the nature of a deferred 
claim, contingent for effectiveness upon the actual failure 
to satisfy the current claim on income, or the inability of 
the issuing organization to pay in full the principal of the 
loan at the time of its maturity. These instruments, thus, 
are redeemable at a definite date and are not permanent 
rights of participation in the enterprise. 

The horizontal classification is based on transferability, 
that is to say, on the right of the original holder to sell, or 
otherwise dispose of, the instrument to another. When 
considered from this angle investment papers fall into two 
groups, namely, (1) non-securities, which include shares 
and mortgages, and (2) securities, which include stocks, 
trust certificates, bonds and notes. 

Non-securities. — Non-securities are investment papers 
characterized by their individuality. They occur, usually, 
as single instruments, and but infrequently in multiples of 



THE NATURE OF SECURITIES 85 

like ones. As uniformity of denomination and value is the 
exception, each single unit is not freely interchangeable with 
every other unit of the same issue. Because of this lack of 
standardization and interchangeability of one unit with an- 
other, their transfer, or sale, from person to person, must 
ordinarily be accomplished through direct bargaining be- 
tween buyer or seller, or their agents, — the selling price 
being agreed upon only after a careful analysis of the earn- 
ing power or value of the economic capital back of each 
individual unit. For this reason, there exists no established 
permanent market where daily sales take place, and where 
the prices offered and asked may be ascertained from hour 
to hour, and day to day. Under these circumstances, trad- 
ing in them cannot be conducted with such ease and facility 
as to characterize them as freely transferable. The chief 
use that is made of them is to render the capital invested 
in business enterprises conducted under personal ownership 
organizations, somewhat more mobile than would be the 
case without them. 

Non-security investment paper is now not widely used 
as an instrument of organization largely because of the 
greater advantages offered by the more serviceable securi- 
ties. Perhaps the best example of the use of non-security 
ownership paper is found in the limitedly transferable shares 
of the partnership associations of this country and England, 
and the Teilhaberschaften of Germany, both of which 
already have been explained.- The credit paper of this class 
consists of simple mortgages and other interest-bearing evi- 
dences of indebtedness that are especially secured by the 
assets of the business enterprise and the non-business 
property of the entrepreneurs. At its best, the non-security 
investment paper can exert but a moderate influence in 
shaping the forms of ownership organization. 

Securities. — Securities, aside from incorporating in them- 

2 See partnership associations in Chapter IV. 



86 SECURITIES-ISSUING ORGANIZATIONS 

selves the claim on income and assets, common to all 
investment papers, possess all of those qualities that have 
been mentioned as not possessed by non-securities, namely, 
existence in large numbers of like kind and like units, com- 
plete interchangeability of one unit for any other of a 
given issue, and unrestricted transferability. When they 
represent ownership interest they are stocks (shares of 
stock) , or trust shares, and when a loan or an extension of 
credit, they are bonds or impersonal notes. It must be 
acknowledged, however, that in so far as the business or- 
ganization is distinct from the entrepreneur who owns its 
securities, both stocks and bonds, when viewed strictly 
from the accounting standpoint, represent credit extended 
to the business organization; and also that the distinction 
between the ownership and credit factors, when measured 
by the extent of control exercised by the owner of the se- 
curities, tends to lose its definiteness and presents the as- 
pect of a gradual transition from one to another. These 
characteristics, however, will be more fully explained in the 
following chapter on Corporate Securities. 

Extent of the Use of Securities. — The issuance of 
securities for business and public use, has become very 
widespread. As the capital concept of the peoples of the 
world has become extended to give recognition and legal 
acceptance to these instruments of organization, govern- 
ments, as well as business men, have not been slow in avail- 
ing themselves of the advantages that they offer. Some idea 
of the extent to which the use of securities has spread 
throughout the world may be gained from the following 
table compiled by the " Moniteur des Interets Materiels " 
of Brussels ^ which shows in millions of francs the securi- 
ties issued by some thirty countries during the years 1909, 
1910, and 1911. 

3 Taken from R. Liefmann, Beteiligungs-und Finanzierungsge- 
sellschaften, p. 36. 



THE NATURE OF SECURITIES 



87 



Country 



In millions of Francs 



1909 



1910 



1911 



Austria Hungary — 

Belgium 

Belgian Kongo 

Bulgaria 

Canada 

China 

Denmark 

Egypt 

France 

Germany 

Greece 

Italy 

Japan 

Latin America 

Luxemburg 

Morocco 

Netherlands 

Norway 

Persia 

Portugal 

Roumania 

Russia 

Serbia 

South African Union 

Spain 

Sweden 

Switzerland 

Tiu-key 

United Kingdom . . . . 
United States 



446 
448 

142 

918 

35 

77 

37 

1727 

3748 

7 

218 

231 

1455 

150 

247 
10 
15 

164 

55 

2060 

138 

'284 

61 

436 

244 

2863 

8000 



955 

446 

119 

1257 

• 53 

162 

59 

1753 

2996 

466 

439 

1632 

3862 



252 

57 

45 

2 

260 

1082 

198 

127 

113 

139 

258 

259 

3721 

5661 



927 

418 

298 

12 

1037 

212 

42 

14 

1332 

2771 

138 

154 

140 

2724 

17 

410 

85 

33 

87 

77 

1466 

345 

235 

306 

50 

240 

189 

1975 

4055 



This table shows very clearly how the use of securities in 
business organization has spread even to the most backward 
countries, such as Persia and Turkey, and is a factor to be 
reckoned with the world over. 

The extent to which the use of securities in business has 
progressed is admirably shown by the report of the Commis- 
sioner of Internal Revenue presenting statistics of income 



88 SECURITIES-ISSUING ORGANIZATIONS 

compiled from the income tax reports for the year 1917. The 
report classifies income from business according to the 
nature of the entrepreneurial organization into three classes, 
namely, that derived from individual business undertakings, 
from partnerships and from ownership securities or stocks. 
A tabular summary of the amount and per cent of income 
from these several sources, for some representative states 
and the United States as a whole follows. 



Sources of Income from Business for some Representative 
States and the United States as Shown by Income Tax 
Returns for 1917 

(Amounts given in millions of dollars) 



State 



California 

Colorado 

Georgia 

Illinois 

Iowa 

Louisiana 

Maryland 

Massachusetts . 
Minnesota. . . . 
Pennsylvania . . 
New Jersey . . . 
New York . . . . 
Washington . . . 

United States . 



From individual From 

business partnerships 



From corpora- 
tion dividends 



Amount Percent Amount Percent Amount Percent 



155 

38 

40 
231 
160 

32 

39 
102 

77 
237 

82 
339 

46 

2865 



57.6 
62.3 
64.5 
56.8 
84.6 
59.3 
44.3 
29.0 
64.2 
42.8 
47.1 
37.7 
68.7 

50.9 



37 

7 

9 

47 

13 

10 

15 

50 

12 

79 

20 

205 

7 

775 



13.8 
11.5 
14.5 
11.5 
6.9 
18.5 
17.1 
14.2 
10.0 
14.3 
11.5 
19.1 
10.4 

13.7 



77 
16 
13 

129 
16 
12 
34 

200 
31 

238 
72 

527 
14 

1992 



28.6 
26.2 
21.0 
31.7 
8.5 
22.2 
38.6 
56.8 
25.8 
42.9 
41.4 
49.2 
20.9 

35.4 



Total 
from 
all these 
sources 



269 

61 

62 

407 

189 

54 

88 

352 

120 

554 

174 

1071 

67 

5632 



It is to be noted, that while the returns indicate that 
35.4 per cent of all income from business for the United 
States as a whole came from dividends of corporations, 



THE NATURE OF SECURITIES 



89 



nevertheless, great variations in percentages are found 
among the several states, ranging from 8.5 per cent in Iowa 
to 56.8 per cent in Massachusetts. It is relatively low for 
agricultural states and high where manufacturing takes a 
prominent place among business undertakings. This leads 
naturally to the conclusion, that the corporation, as the 
chief securities-issuing type of ownership organization, is 
the favorite form under which to conduct a manufacturing 
or industrial enterprise. The reports of the Bureau of the 
Census seem to indicate that the personal ownership types of 
organization in manufacturing, while exhibiting a slight in- 
crease in actual number from 1904 to 1914, nevertheless 
show a relative decrease in comparison with securities- 
issuing types. In the number of wage earners employed 
and the value of their product, the decline of the personal 
ownership types is quite pronounced. 



Character or Ownership Organization of Manufacturing 
Establishments in the United States ^ 





1904 


1909 


1914 


Number of estab- 
lishments: 

Individual 

Corporation . . . 
other 


113,946 
51,097 
51,137 


Per 
cent 
52.7 
23.6 
23.7 


140,605 
69,501 
58.385 


Per 

cent 
52.7 
25.9 
21.7 

12.2 
75.6 
12.2 


142,436 
78,151 
55,204 


Per 
cent 
51.6 
28.4 
20.0 


Totals 

Number of wage 
earners: 

Individual 

Corporation . . . 
Other 


216,180 

755,923 

3,862,698 

849.762 


13.8 
70.6 
15.5 


268,491 

804,883 

5,002,393 

807.770 


275,791 

777,568 

5,649,646 

679,123 


10.1 

80.3 

9.7 


Totals 

Value of product: 

Individual 

Corporation . . . 
Other 


5,468,383 

$1,702,830,624 

10,904,069,307 

2,187,002,632 


11.5 
73.7 
14.8 


6,615,046 

$2,092,061,504 
16,341,116,634 

2,288,823,732 


9.9 
79.0 
11.1 


7,036,337 

$1,925,518,298 

20,177,084,844 

2,143,831,582 


7.9 

83.2 

8.8 






Totals 


$14,793,902,563 




$20,672,051,870 




$24,246,434,724 





* From the reports of the Bureau of the Census. 



90 SECURITIES-ISSUING ORGANIZATIONS 

Statistics for more recent years, indicate that the issu- 
ance of securities for business purposes, while it did suffer 
severely from the war, has, nevertheless, kept pace with pre- 
ceding years. This is particularly true of the United States, 
of Japan, and of some of the South American countries 
which were not so seriously affected by the conflict as were 
the countries of Europe. But even in Europe, the quantity 
of securities issued for business purposes since the war is 
without precedent. This unusual rise may be ascribed in 
large measure to the decline in the value of money and the 
prospect of large profits inspired by high prices, caused by 
a general scarcity of goods. The issuance of the so-called 
" stock dividends " to avoid the technicalities of the federal 
income tax, is also a contributing factor in this country. 
The trend of security issues put out in the United States by 
railroads, industrial and public service enterprises is shown 
by the following table. ^ The amount used for refunding is 
not an addition to the total of securities in the country, but 
represents the amount of new securities directly substituted 
for old ones. 

5 From data compiled by Mr. Brown of the Guaranty Trust Co. of 
New York. 



THE NATURE OF SECURITIES 



91 



New Secueities Issued in the United States for Business 
Purposes, 1913-1920 





Railroad 


Industrial 


Public 
utility 


Corporate 
Total 


1920 (to May 30) 
Bonds 


$81,875,000 
138,255,000 


$140,468,000 
279,604,000 
908,301,550 


$70,973,500 

129,217,000 

54,579,150 


$293 314 500 


Notes . . . 


497 076 000 


Stock 


962,880,700 


Total 

1919 

Bonds 


$220,128,000 

118,330,600 
132,588,00a 


$1,278,373,550 

301,475,000 

219,136,000 

1,582,575,710 


$254,769,650 

272,335,300 

252,408,500 

66,108,890 


$1,753,172,200 
692,140,900 


Notes 


604,132,500 


Stock 


1,648,684,600 


Total 

1918 

Bonds 


$250,918,600 

138,514,100 
71,198,500 


$2,103,186,710 

134,535,000 
246,016,000 
174,124,750 


$590,852,690 

167,995,000 

261,563,900 

22,044,750 


$2,944,958,000 
441 044 100 


Notes 


587,778,400 
196,169,500 


Stock 


Total 

1917 
Bonds 


$209,712,600 

142,500,000 

276,165,000 

22,192,400 


$554,675,750 

243,325,000 
217,056,400 
312,020,080 


$451,603,650 

148,498,200 

145,645,600 

69,069,470 


$1,215,992,000 
534,323 200 


Notes ... 


638 867 000 


Stock 


403,281,950 


Total 

1916 
Bonds ... 


$440,857,400 

$229,000,000 

126,000,000 

16,000,000 


$722,401,480 

$241,000,000 
137,000,000 
573,000,000 


$363,213,270 

$383,000,000 

114,000,000 

45,000,000 


$1,576,472,150 
$853 000 000 


Notes 


377 000 000 


Stock 


634,000,000 


Total 

1915 
Bonds 


$371,000,000 

418,500,000 

188,000,000 

16,000,000 


$951,000,000 

137,500,000 

96,000,000 

337,500,000 


$542,000,000 

149,000,000 

137,000,000 

38,000,000 


$1,864,000,000 
768,000,000 


Notes 


421,000,000 


Stock 


390,500,000 


Total 

1914 
Bonds 


$684,500,000 

303,000,000 

390,000,000 

21,500,000 


$571,000,000 

146,500,000 
58,000,000 
67,000,000 


$324,000,000 

195,000,000 

107,500,000 

43,500,000 


$1,579,500,000 
644,500,000 


Notes . . 


555,500,500 


Stock 


132,000,000 


Total 

1913 

Bonds 


$714,500,000 

303,500,000 
421,000,000 
234,000.000 


$271,500,000 

66,000,000 

91,000,000 

121,000,000 


$346,000,000 

280,500,000 

105,000,000 

68,000,000 


$1,332,000,000 
650,000,000 


Notes 


617,000,000 


Stock 


423,000,000 


Total 


$958,500,000 


$278,000,000 


$453,500,000 


$1,690,000,000 



The amounts used for refunding and new capital for some of the years 
covered in the above table are as follows: 





Amount used 


New 




for refunding 


capital 


1917 


$397,000,000 


$1,179,472,150 


1916 


325,000,000 


1,359,000,000 


1915 


795,000,000 


784,500,000 


1914 


550,000.000 


782,000,000 



92 SECURITIES-ISSUING ORGANIZATIONS 

The Transferability of Securities. — The quality of 
free and unrestricted transferability is one of the most 
important characteristics peculiar to securities. The 
instruments themselves, as well as all the rights, duties, 
powers and obligations that the owner of them possesses, 
may be freely transferred by sale, or any other legitimate 
means, from person to person in exactly the same way as a 
bushel of wheat might be sold. 

This quality has given rise to brokers who specialize in 
serving buyers and sellers of securities by acting as agents 
for them. They facilitate transactions in securities by 
finding buyers for those offered and by finding securities for 
persons who wish to buy. To aid them in this work, these 
brokers have established stock exchanges, — institutions 
where brokers and others may gather to buy and sell 
securities for themselves and their principals. The largest 
of these exchanges are found in New York City, London, 
Paris and Berlin; but practically every country and many 
of the large cities of the world have their own smaller 
exchanges. 

The freedom with which securities are bought and sold 
on these exchanges is well brought out in the following sum- 
mary of annual sales of stocks and bonds on the New 
York Stock Exchange from 1912 to 1919. 



THE NATURE OF SECURITIES 



93 



Securities Sold on the New York Stock Exchange 

1912-1919 



Year 


Shares of Stock 


Bonds 




(Number of shares) 


(in dollars) 


1912 


131,128,415 


$675,213,500 


1913 


83,470,693 


501,571,020 


1914 6 


47,900,568 


461,522,600 


1915 7 


173,145,203 


961,094,700 


1916 


233,311,993 


1,140,851,950 


1917 


185,628,948 


1,057,190,200 


1918 


144,118,469 


2,067,827,500 


1919 


316,787,725 


3,808,860,150 



6 The Exchange was closed for several weeks in 1914 
following the outbreak of the European War. 

7 The great increase in the sale of bonds from 1915 on is 
due largely to government bond issues. 

It should be borne in mind that the New York Stock 
Exchange is only one — although by far the largest — of 
about a score of exchanges operating in this country alone. 
Thus, these figures would have to be considerably aug- 
mented if they are to show the total dealings in securities in 
the United States. The average value of the shares of stock 
sold on the New York Stock Exchange in 1919, at a con- 
servative estimate, can be taken at about $75.00 per share, 
which would give the stocks sold on this exchange during 
that year a selling value of $23,759,000,000, making a 
combined total for stocks and bonds of well over twenty- 
five billion dollars. 

The importance that such statistics have in relation to 
the subject of business organization, arises from the fact 
that they show clearly the great liquidity that characterizes 
the ownership of economic capital when it has once been 
brought under the control and ownership of securities- 
issuing organizations. 



94 SECURITIES-ISSUING ORGANIZATIONS 

Further evidence of this liquidity is shown by the fol- 
lowing table, which gives in parallel columns the total 
outstanding securities listed on the New York Stock Ex- 
change by several of the larger American corporations, the 
par value of the securities sold on the Exchange during 
1919 and the per cent that the securities sold is of the secur- 
ities listed. 

Table Showing Securities Listed on the New York Stock 
Exchange, the Par Value of Securities Sold and the 
Per Cent of Turnover of a Few Large American Corpo- 
rations FOR THE Year 1919 



Name of Corporation 


Pecurities listed 
on exchange 


Par value of 
securities sold 
on exchange 


Per cent 

of 
turnover 


American Can Co. 

Stock, common 


$41,233,300 
41,233,300 
11,872,500 
94,339,100 


$293,494,000 
4,134,500 


711 8 


pref'd 


10 3 


Bonds 








Totals 


297,628,500 


315 4 






American Locomotive Co. 
Stock, common 


25,000,000 
25,000,000 
50,000,000 


272,994,500 

1,419,500 

274,414,000 


1092 


pref'd 


5 7 


Totals 


548 8 






American Telephone & Tele- 
graph Co. 
Stock 


443,951,100 
407,434,080 
851,385,180 


70,467,000 
16,226,500 
86,693,500 


15 9 


Bonds 

Totals 


4.0 
10.2 


International Harvester 
Company 

Stock, common 

pref'd 


80,000,000 

60,000,000 

140,000,000 


50,800,000 

1,587,300 

52,387,300 


63.5 

2 6 


Totals 


37 4 






International Mercantile 
Marine Co. 

Stock, common 

pref'd 

Bonds 


39,230,900 

48,867,300 

39,061,000 

127,159,200 


607,560,000 

448,375,500 

16,490,000 

1,072,425,500 


1549.8 

917.5 

42 2 


Totals 


843.4 



THE NATURE OF SECURITIES 



95 



Name of Corporation 


Securities listed 
on exchange 


Par value of 
securities sold 
on exchange 


Per cent 

of 
turnover 


New York Central R. R. 
Company 
Stock 


$247,869,100 
688,285,200 
936,154,300 


$76,024,800 
14,779,000 
90,803,800 


30.6 


Bonds 


2.2 


Totals . .... 


9.7 






United States Rubber 
Company 
Stock, common 


' 67,679,500 

62,036,400 

127,715,900 


433,855,500 

5,370,000 

439,225,500 


641.0 


pref d 


8.7 


Totals 


343.9 






Cluett, Peabody & Co. 

Stock 


25,000,000 


4,580,000 


18.3 






American Smelting & 
Refining Co. 
Stock, common 


60,998,000 

50,000,000 

31,881,400 

142,879,400 


202,868,000 
4,315,000 
3,169,000 

210,352,000 


332.6 


pref'd 


8.6 


Bonds 

Totals 


9.9 
147.2 


United Cigar Stores Co. 

Stock, common 

pref'd 


5,897,250 

4,527,000 

10,424,250 


152,349,500 

151,000 

152,500,500 


2600.0 
3.3 


Totals 


1464.0 


United States Steel 
Corporation 
Stock, common 


508,302,500 
360,281,100 

586,786,348 


3,257,047,000 

18,309,500 

8,925,000 


640.8 


pref'd 


5.8 


Bonds 


1 5 






Totals 


1,455,369,948 


3,284,281,500 


225.7 







Some of these corporations exhibit extreme activity, and 
others a high degree of inactivity in dealings in their secur- 
ities. Thus, while the sales of the securities of the American 
Telephone and Telegraph Company average only 10.2 per 
cent of those listed, the sales of the United Cigar Stores 
Company average 1464 per cent. 



96 SECURITIES-ISSUING ORGANIZATIONS 

It should also be noted, that the percentage of sales is 
lowest in the case of bonds and highest in common stock. 
This is no more than natural; the bonds are ordinarily 
safe and conservative investments whose price fluctuates 
little day by day, while the common stock frequently is 
highly speculative, with wide daily price fluctuations 
influenced in part, at least, by anticipated profits. This, 
however, is not the only reason for the enormous sale of 
stocks. An interesting insight into a contributing cause, is 
given by a report issued by the directors of the United 
States Steel Corporation on June 30, 1920. This report 
gives the approximate number of shares of the corpora- 
tion's common stock held by investors and by speculators 
on certain dates as follows : 

June 30, 1920 Per Cent December 31, 1916 Per Cent 

Brokers 1,631,406 32.09 2,950,436 58.04 

Investors 3,451,619 67.91 2,132,589 41.95 

Total issue ... 5,083,025 5,083,025 

The stock held by the brokers is chiefly for the purposes 
of speculation, and not primarily for the return in divi- 
dends, which is the chief aim of the investor. Brokers' 
stocks are dealt in on the Stock Exchange like wheat or 
cotton on the Produce Exchange, — as though they were 
simply commodities whose price is determined by the general 
variation in intensity of demand and supply. It frequently 
happens that the stock of a corporation has practically no 
prospect of receiving a dividend, and yet has a speculative 
value that causes it to sell at $10 to $20 per share. Such 
was the case, for example, with common stock of the old 
United States Leather Company, which sold at about $10 
a share in the face of unpaid dividends aggregating 41% 
due the preferred stock, and payable before the common 
stockholder could hope to receive an income from his se- 
curities. The same condition has, from time to time, been 
very marked among stocks of defunct corporations. It is 



THE NATURE OF SECURITIES 97 

because of their controlling power that they seldom lose 
their value completely so long as an attempt is made to 
continue the business. 

The Principle of ** Securitization *' of Ownership. — 
Enough has been said of the nature, extent and effect of se- 
curities to show the importance of the role that they play 
in modern business organization. It is, indeed, very doubt- 
ful whether the great establishments found today in the 
fields of industry, commerce, transportation, finance, min- 
ing, etc., could operate at all imder a system of private 
ownership of capital, but for the existence and general use 
of securities. Thus far, however, only the nature of securi- 
ties themselves has been discussed, and nothing has been 
said about the principles that underlie securitization of 
business capital; that is to say, the use of securities as in- 
struments of organization to give the holder thereof a claim 
to the designated business capital and to the income ac- 
cruing to it. 

Elimination of Personal Control, the Keystone. — 
Under the forms of organization that have thus far been 
described, the ownership, management and direction of the 
plant and equipment of the business remains in the hands 
of the natural entrepreneur, regardless of whether he is an 
individual proprietor or a partner. The power to withdraw 
is his, but when he exercises it he breaks up the organi- 
zation. Such types of organization do not assure to the 
business a continuity of existence for a definite period of 
time, because they do not entertain the concept of the ex- 
istence of the business separate and apart from the 
lives of the owners. Here, then, we find the first and 
most important point of departure from the principles 
underlying the personal ownership organizations. Through 
the use of securities the existence of the business 
becomes divorced from the life and being of the 
natural entrepreneur. It endures for a definite period 



98 SECURITIES-ISSUING ORGANIZATIONS 

of time, or in perpetuity, unless voluntarily and 
lawfully abandoned by the operating and owning body. 
This body is interposed between the entrepreneur and the 
business in which he is interested. It is not a conscious, 
tangible being, but merely a hypothetical one; and thus, it 
is incapable of conscious action, except through the agency 
of natural persons. This delegation of authority is pro- 
vided for, and the responsibility therefor allocated, through 
the medium of stock certificates. These, as already stated, 
incorporate in themselves a claim on income and assets 
and a right to participate in the management, etc., of the 
enterprise. It is the person of the holder of this stock, 
who exercises the rights that belong to it. The securi- 
tization of business, thus, results in the introduction of a 
new principle of entrepreneurial organization — the inter- 
position of a securities-issuing body between the entrepre- 
neur and his business capital. Technically speaking, the 
securities-issuing body itself is the entrepreneur of the busi- 
ness that it owns and operates. But, since it can function 
only through natural persons to whom also part of the 
liability may carry over, this technicality may be dis- 
regarded. 

Types of Securities-Issuing Organizations. — Up to the 
present time three important types of securities-issuing 
organizations have been evolved. For all of them, the 
underlying principle, as explained above, is the same. The 
characteristics and qualities that distinguish one from the 
other are of a legal nature and of such importance to a 
thorough understanding of each of the types that they are 
reserved for fuller consideration and explanation in suc- 
ceeding chapters. 

The first of these types is a development of the partner- 
ship. A voluntary association, or company, is formed in 
whose managing board is vested the control of the business, 
while the ownership for all practical purposes is in the asso- 



THE NATURE OF SECURITIES 99 

elation itself. Membership in this association constitutes 
entrepreneurial participation in the business. This is obtain- 
able through the acquisition of the shares of stock that are 
issued by the association, and that have all of the earmarks 
of securities. Creditor's interest is represented by bonds or 
notes. Such associations are known as joint stock com- 
panies or joint stock associations. 

The second type is formed by interposing between the 
entrepreneur and his capital an artificial person, created by 
the state and existing only in contemplation of law. The 
right of ownership, and the power of operation of the busi- 
ness, is vested in this person who depends for conscious 
action upon policies dictated by the stockholders and 
carried out by directors and agents. This form is the 
corporation. 

The third type rests upon the transfer of title to the 
property, together with power of management or direction, 
in trust to a person or body of persons. The entrepre- 
neurs thus become the beneficiaries of the trust and share in 
the profits according to the number of units of trust certifi- 
cates (securities) that they own. This form is called the 
securities-issuing trust or trust on shares. 

It is under these three types of entrepreneurial organi- 
zation, that the great business undertakings of today are 
conducted. Of the three, the corporation offers the great- 
est inducements to the undertaker of a business. The joint 
stock company has seen its best days, and the use of the se- 
curities-issuing trust has as yet not come into general favor. 
Thus, the corporation is, today, the ownership foundation 
upon which have been erected the world's big business 
establishments conducted as private enterprises. 



CHAPTER VI 
THE JOINT STOCK COMPANY 

The principle underlying all securities-issuing organi- 
zations is the creation of a business organization that shall 
enjoy an existence separate and apart from the members 
that compose it. To accomplish this there must be 
formed an organization that has more or less permanent 
control over a definite amount of business capital con- 
tributed to it by its members, and that will at the same 
time permit a member freely to withdraw without dis- 
rupting its unity. The earliest approach to the realization 
of this idea was the joint stock company.^ 

Definition. — From the legal standpoint, the joint stock 
company is a partnership, created by a contract in the form 
of written articles of association that set forth clearly the 
conditions under which the company is to be formed and 
operated. It may be defined as a voluntary association 
of individuals for profit, having a capital divided into 
transferable shares, the ownership of which is a condition 
of membership, directed by a board selected by the mem- 
bers and operated by its agents. In other words it is a 
securities-issuing partnership that, in a limited respect, 
has an existence apart from the lives of its members. Thus, 
it is essentially a common law organization. 

Formation. — In the United States a joint stock com- 
pany may generally be formed under common law rules by 

1 In France the nearest approach to our joint stock company is the 
societe anonyme par actions, in Germany the Aktiengesellschaft 
and in Italy the societa per azioni. 

100 



THE JOINT STOCK COMPANY 101 

drawing up articles of association which are subscribed to 
by the organizers. However, in most of the states these 
laws have been reduced to statutes. In a few, special re- 
quirements regulating capitalization, securities, registration, 
method of bringing suit, etc., exist. In New York, for ex- 
ample, these companies must be formed under the same 
general laws that govern the formation of a corporation. 
That is to say, the organizers must frame their articles of 
association, submit them to the secretary of state, pay a 
franchise tax and have the company properly registered 
with a designated official in the cbunty and the state. In ad- 
dition to this, every stock company formed under the laws 
of this state must, within sixty days after its formation, 
and thereafter in each January, file with the secretary of 
state and with the county recorder a written certificate 
giving its name, date of organization, mmaber of stock- 
holders, names and residences of its officers, and its place 
of business. In England and the countries of Continental 
Europe the formation of these companies has been regu- 
lated more or less strictly ever since the great stock 
swindles of the early eighteenth century which were brought 
to a climax by the company formed by John Law to finance 
France. Thus, the common law rules for the formation 
of joint stock companies have been almost universally 
superseded by statutory regulations. In some countries, 
as in Germany and Belgium, these are very strict and exact- 
ing, while in England and the United States the tendency 
is to adhere more closely to the common law practice. 

The Articles of Association — the name applied to the 
written contract by virtue of which the company is created 
— usually contain statements setting forth (1) the name 
under which the company is to do business, (2) its place 
of business or main office, (3) the objects for which it is 
organized, (4) its capital, number of shares and their man- 
ner of assignment or transfer, (5) the number, manner of 



102 SECURITIES-ISSUING ORGANIZATIONS 

selection and duties of the officers, directors and trustees, 

(6) the duties, rights, obligations, etc., of the members, 

(7) procedure for amending or altering the articles of asso- 
ciation, (8) the term of life and the manner in which 
voluntary dissolution may be effected. ^ Where the common 
law rules of formation generally prevail, the organizers en- 
joy considerable latitude in framing the articles and may 
provide any number and variety of special features. 

Capitalization and Stock. — The capital of the joint 
stock company is customarily stated as a definite sum of 
money, which has been or is to be contributed by the 
organizers and others, who receive shares of stock to repre- 
sent their contributions. But there are exceptions to this 
general rule. In organizing joint stock companies to 
operate the beet sugar enterprises of Germany the farmers 
were frequently given shares of stock in return for which 
they signed contracts obliging themselves to furnish the 
company annually a stipulated quantity of beets with a 
stated sugar content. If they failed to keep their contract 
the shares would revert to the company. The capital, or 
joint stock as it was formerly called, remains as the in- 
divisible property of the company, so that a shareholder 
may not withdraw from the company that part to which 
he is entitled except in case of dissolution. If he desires 
to withdraw from the enterprise or to liquidate his interest 
in it he merely assigns or sells his shares to some other 
person, without ordinarily affecting the capital over which 
the company has control. 

Ownership is represented by shares of stock which have 
all the earmarks of securities. Each share is usually a like 
fractional part of the capital. Thus, in the articles re- 
ferred to in the preceding note it is provided that the capi- 
tal of $3,000,000 is divided into 30,000 shares of $100 each 

2 See the copy of the Articles of Association of the Pierce- 
Fordyce Oil Association — Part VI, Form 4. 



THE JOINT STOCK COMPANY 103 

all of which has been paid in by the subscribers. In both 
England and America it is not necessary that the company 
shall have received the full amount of the stated value of 
each share in payment thereof, but in Germany and Bel- 
gium the statutes prescribe that no stock may be issued by 
the company for cash, property or services of less value 
than the par of the stock. Certificates representing single 
shares or multiples thereof, are given the shareholders as 
evidences of ownership. Each certificate states that 
the holder, who is usually named, is the owner of 
the stated number of shares of the capital stock of 
the company, sets forth the more important limitations 
on the rights and privileges of the holder, the pro- 
cedure to be followed in case of transfer or assignment 
and bears the signatures of the president and secretary of 
the company. The transfer is effected when the holder of 
the certificate signs it over to another person who has the 
transfer recorded on the books of the company. 

Ordinarily, each shareholder has a claim on the unen- 
cumbered assets and earnings of the company equal to 
the same percentage that his shares bear to the total num- 
ber of shares that are outstanding, and also one vote for 
each share that he owns. However, several classes of 
shares may be provided for, so that the holders of one 
class may be given preference over the holders of other 
classes in respect to one or more of the above points. 

Other securities such as bonds and notes may also be 
issued as part of the series of securities. But, in practice, 
securities of this type seem to have found little favor, 
probably because they impose a relatively heavy risk upon 
the shareholders who, in most cases, assume partnership 
liability. 

Internal Organization. — The elements of internal or- 
ganization of the joint stock company are (1) the body of 
shareholders, (2) the board of governors or directors, (3) 



104 SECURITIES-ISSUING ORGANIZATIONS 

the trustees and (4) the officers and agents. It is through 
these that the company becomes an active business unit. 

(1) The body of shareholders is a functioning element of 
the organization only when it has been properly called to- 
gether at an annual or special meeting in accordance with 
the provisions of the articles of association or the statutes. 
At the regular or annual meetings, the shareholders vote 
to elect persons to serve as directors for the ensuing year, 
and to pass upon any and all matters that the board 
may see fit to place before them. The body of shareholders 
also has power to amend and alter the articles of associa- 
tion, to dissolve the company or abandon the enterprise. 
This body, thus, constitutes the basic or fundamental ele- 
ment in the administrative organization. Generally it is 
too large and unwieldy to participate in any direct ad- 
ministrative work, and for this reason it is usually stipu- 
lated in the articles that the active control of the business 
shall be vested in the board of directors or governors. 
The individual shareholder himself has absolutely no 
power to bind the company in any business or other trans- 
action. Here, then, is one important point of difference 
distinguishing the joint stock company from the 
partnership. 

(2) The board of directors, governors or managers is 
usually authorized to exercise " full power and authority 
in the conduct of the business," to call meetings of the 
board and of the body of shareholders, to appoint trustees 
and officers and to declare dividends.^ Such boards are 
nearly always elected by the holders of the stock certifi- 
cates. Ownership of at least one share of stock is ordi- 
narily prescribed as a qualification for membership on the 
board : and the term of office is one year. 

3 The commercial code of Germany provides that dividends shall 
be declared by the body of stockholders properly assembled in a 
meeting called for that purpose. 



THE JOINT STOCK COMPANY 105 

(3) Three or more trustees to be appointed by the board 
of directors are provided for in the articles, " in whose name 
all investments and title to all property are to be made and 
held under a declaration of trust for and on behalf of the 
association." The trustees" are necessary if the company is 
to hold any real estate, since under the common law real 
property can be held only in the name of a person. In some 
European countries trustees are dispensed with by statutory 
provisions empowering the company to hold such property 
in its own name. 

(4) The officers are usually a president, a vice-president, 
a secretary and a treasurer. These are appointed by the 
board of directors, which may also delegate to them such 
of its powers and duties as may be consistent with the 
articles of association. In addition to this, the articles 
specifically assign to each of the officers such duties as it 
is customary for them to perform. 

External Relations — The joint stock company is not 
a legal entity. In this respect it is like the partnership, 
for it cannot sue or be sued, in its own name. If a legal 
action is to be brought by or against the company, it must 
be by or against one or more of the members, severally and 
jointly. Some of the states have modified this rule some- 
what by statute. In New York, for example, suit must 
first be brought against the president or treasurer, and if 
no satisfaction is secured in case of a judgment against 
them, the complainant may proceed to sue under the com- 
mon law rule. However, modifications such as the above 
have no power or effect in states other than the one in 
which they have been made. Thus, in a case decided in 
1871 it was held that a citizen of Massachusetts might 
sue a member of a New York joint stock company to re- 
cover a claim against the company without first bringing 
his action against the president or the treasurer.* 

4 Tajt V. Ward, 106 Mass. 518. 



106 SECURITIES-ISSUING ORGANIZATIONS 

Furthermore, the members are individually liable for 
the entire debts of the company, just as in the partnership. 
However, in practice, limited liability may be secured by 
providing in any and all contracts made by or in behalf of 
the company, that it is specifically understood, as a part of 
such contract, that the company's property solely is bound. 
But such a provision must be made part of the terms of 
the contract to be binding. 

Permanence and Stability. — In the matter of dissolu- 
tion the partnership principle is not followed. Although at 
law, the articles of association when acted upon do not set 
up a legal entity, they, nevertheless, do establish a busi- 
ness entity, or unit, which the law recognizes as somewhat 
distinct from the persons of the several members. Conse- 
quently any member may freely withdraw, may become a 
bankrupt or may be taken by death without affecting the 
continuity of the organization. The company may be 
created in perpetuity or for a definite number of years. 
In the latter case, its period of life may be extended by 
renewal of the agreement. The difficulty of liquidating the 
assets and distributing the receipts among the several share- 
holders, is of itself a powerful influence working toward 
the renewal of the agreement. 

With the exception of forced dissolution arising out of 
a condition of insolvency, or a decree of the courts requir- 
ing the discontinuance of the business because of gross and 
continual violation of the law, all other causes of disso- 
lution may be considered to be voluntary. The joint stock 
company is, therefore, one of the most stable and at the 
same time one of the most flexible types of ownership 
organization in use today. This characteristic has been 
chiefly responsible for the remarkably long life enjoyed 
by some of these companies. The British East India 
Company, for example, was formed about 1600 and con- 
tinued its operation until the middle of the nineteenth cen- 



THE JOINT STOCK COMPANY 107 

tury. In this country the Adams Express Company and 
others began business as joint stock companies a few years 
prior to 1860 and, in 1919, were still operating under this 
form of organization. 

Value and Use of the Joint Stock Company. — The 
heyday of the joint stock company was the great period 
of colonial expansion beginning during the latter part of 
the sixteenth century and closing with the end of the eight- 
eenth century. We are told that the great trading com- 
panies of that period were nearly all organized as joint 
stock companies through grant of a charter by the crown 
giving them trading monopolies in certain sections of the 
world. It was not until after the industrial revolution and 
the growth of large scale industrial enterprises, that they 
were organized for industrial, as distinct from commercial, 
purposes. They exist to-day in large numbers in England 
and the countries of continental Europe, but are extremely 
rare in the United States. One reason for this is that in 
this country, corporations could be easily and inexpensively 
formed and were given limited liability as early as 1819, 
while in England the cost of incorporation was heavy and 
limited liability was not generally given to corporations 
until 1862; and a similar condition prevailed on the conti- 
nent. Even to-day in many countries of Europe it still 
is more difficult and costly to form a corporation than a 
joint stock company; but even so, the former is gradually 
displacing the latter. Thus, according to the German Offi- 
cial Commercial Register, we find that there were, in use 
in 1909, 16,508 corporations as against 5,222 joint stock 
companies. 

On the whole, it may be said that although the joint 
stock company has quite generally given way to the corpo- 
ration as the favorite type of securities-issuing organiza- 
tion, it nevertheless still has marked advantages over the 
partnership. If properly organized the danger from part- 



108 SECURITIES-ISSUING ORGANIZATIONS 

nership liability is too remote to act as a serious drawback; 
and the freely transferable interest represented by shares 
of stock as well as the stability of the organization are 
advantages that cannot be overlooked. It can be success- 
fully used where the persons originally interested in the 
project subscribe to all of the stock and hold it until the 
business is on a sound, paying basis. However, the un- 
limited liability accepted by the shareholder has worked as 
a deterrent, preventing the company from finding a ready 
market for its securities, particularly if the business is only 
in the course of establishment, and has not yet been fully 
built up and put into operation. Another disadvantage 
applicable to companies of this type organized in the 
United States, is the fact that any special statutory privi- 
leges granted them in any given state have no force or 
effect in other states. These disadvantages — moderate 
though they are — leave little doubt concerning the ulti- 
mate fate of the joint stock company. It has already been 
put in a position of minor importance and the probability 
is strong that it will continue to lose favor, and, in time, 
will practically be driven out of use by the corporation. 



CHAPTER VII 

THE CORPORATION — ITS NATURE AND ESSENTIAL 
CHARACTERISTICS 

The corporation is the second, and by far the most 
important one of the securities-issuing, entrepreneurial or- 
ganizations that are before us for consideration. Because 
of its great importance in modern business, it will be 
necessary to devote several chapters of this text to an ex- 
planation of its intricate features and characteristics. It 
is perhaps better to outline its broad, general features first, 
and then to take up in greater detail its mechanism and 
methods of operation. 

The corporation did not spring spontaneously into gen- 
eral use as a form of entrepreneurial organization. Only 
through the slow process of a change in social custom did 
it win for itself the place that it now holds in the busi- 
ness world. As a legal institution it was kno\\Ti to the 
Romans, who, however, made little use of it for business 
purposes. During the middle ages, in England as well as 
on the European continent, it came into general use as 
a political institution. The boroughs and towns of that 
period were granted corporate charters by the crown or 
suzerain lord and were operated as municipal corporations. 
Its use in business developed gradually, beginning about 
the sixteenth century. By the close of the eighteenth cen- 
tury it had fairly well established itself in that field as a 
common law institution. But even at that time it enjoyed 
a bad repute, as is evidenced by the fact that some of the 
early books on political economy condemn it in no uncer- 

109 



110 SECURITIES-ISSUING ORGANIZATIONS 

tain language.^ Even as late as 1840, the governor of the 
State of Massachusetts in a message to the legislature re- 
quested the passage of stringent laws against the use of 
corporations, because they were so generally organized for 
fraudulent purposes. To-day, however, it stands unchal- 
lenged as the leading form of entrepreneurial organization 
in the business world. 

Definition. — Blackstone, in his Commentaries on Eng^ 
lish Law, published in 1765, defines the corporation in 
the following words: " A corporation is an artificial person 
created for preserving in perpetual succession certain rights> 
which being conferred on natural persons only, would fail 
in the process of time." Another definition, — and one that 
has become the most famous in the annals of American 
jurisprudence, — is that given by Chief Justice John 
Marshall of the United States Supreme Court in his de- 
cision in the Dartmouth College case in 1819. There he 
defines the corporation as " an artificial being, invisible, 
intangible, and existing only in contemplation of law." 
The first of these definitions lays emphasis upon the con- 
tinuous life of the corporation, which endures under com- 
mon-law rules in perpetuity, and therein differs materially 
from natural persons whose rights expire with them on 
death. The second definition describes, in admirable terms, 
this artificial person that has a legal being and legal rights, 
powers and privileges of its own, apart and distinct from 
those of the natural persons, who, as entrepreneurs, avail 
themselves of it for the purpose of owning and conducting, 
a business enterprise. It is invisible and cannot be seen. 
It is intangible and cannot be touched. And yet it is a 
real legal person that can in its own right own and operate 
a business whose capital may consist of real economic 
goods, as plant and equipment, of money capital or of 

1 See Harvard Studies, History of English Monopolies, Seven- 
teenth Century. 



THE CORPORATION — CHARACTERISTICS 111 

securities. But even in view of all this, it is, neverthe- 
less, an impersonal type of organization; for it cannot 
function, but through the agency of natural persons. 

Legal Entity. — The fact that the corporation is an 
artificial person, fixes its status as a legal entity, a being 
with all of the rights, privileges and obligations of a per- 
son before the law. Herein, it differs fundamentally from 
the partnership and joint stock company. The latter can 
sue and be sued only in the names of their several mem- 
bers, but the corporation may sue and be sued through its 
officers or agents, in the same way as any natural person. 
It may own real estate and any other property in its own 
name. In fact, it may be granted the right to enjoy and to 
exercise, within reasonable limits, all rights and powers and 
privileges that a natural person^ might avail himself of 
when engaged in a similar business undertaking. 

Creation. — As an artificial person, the corporation is 
a creature of the state. It is created through the exercise 
of sovereign power by the state, within lawful constitu- 
tional limitations. Certain natural persons, desiring to 
form a corporation, petition the sovereign state, through the 
state's secretary, or some other designated official, for a 
charter — a document that is evidence of the creation and 
existence of the corporation, and, at the same time, circum- 
scribes and defines its powers, rights and privileges. The 
grant of such a charter to the petitioners, who are called in- 
corporators, constitutes — when acted upon by them — a 
legal contract between the state on the one hand, and the 
incorporators as agents of the corporation on the other. 
Once having granted such a charter the state, in this coun- 
try, is estopped by a provision in the Federal Constitution 
from revoking or in any way impairing the obligation of 
such a contract. Thus, it cannot subsequently alter the 
provisions of the charter, unless by specific reservation or 
general statute it reserves that right as a condition of the 



112 SECURITIES-ISSUING ORGANIZATIONS 

grant. As a case in point, we need but to refer to the Dart- 
mouth College case mentioned above. This institution was 
granted a charter in perpetuity by the British King while 
New Hampshire was still a British colony. The war of 
independence intervened between the time of that grant 
and the attempt by the State of New Hampshire to revoke 
the charter and to reorganize the college to suit itself. The 
United States Supreme Court held that the charter consti- 
tuted a contract between the College and the sovereign 
power of the crown, and that the state of New Hampshire 
simply stepped into the crown's place and was bound under 
the Constitution of the United States, to respect the con- 
tract; and that consequently, it might in no way alter 
the provisions of that contract without the consent of the 
other party. This applies with equal force to business 
corporations. There is now no state in the Union which 
will grant a corporation charter without some form of reser- 
vation. The same principle is quite generally follow^ i by 
all political jurisdictions empowered to grant charters, es- 
pecially for business purposes, whether they be independent 
nations or not. 

In the early history of corporations, the charters were 
granted by special act of the creating power. In this coun- 
try, a special act of the legislature of a state was necessary 
to create a corporation ; while in England and the European 
countries this power was vested in the crown or head of the 
government. This procedure gave rise to charter buying, 
bribery, favoritism and many other objectionable practices. 
It also resulted in a complete lack of uniformity, not only 
as to the powers granted, but also in the matter of control, 
restrictions and obligations. The effect of these conditions 
was to retard the general use of this very serviceable type 
of entrepreneurial organization, rather than to stimulate 
it, and to give rise to a strong and insistent demand for 
greater equality of opportunity and reform in procedure. 



THE CORPORATION — CHARACTERISTICS 113 

By the middle of the last century, however, most of the 
creating jurisdictions had adopted general statutes laying 
down uniform rules in the form of general incorporation 
laws for the formation and control of corporations. The 
fundamental principles underlying these laws were con- 
sidered to be of sufficient importance to be incorporated 
into the constitutions of many of the states of our Union. 
Nevertheless, as between states, there is, even today, an 
astounding lack of uniformity in the laws governing the 
formation, operation and control of the corporate form of 
organization. In this particular, the United States is still 
far behind most foreign countries, which have laws that 
apply uniformly throughout their territory. The desira- 
bility of a uniform federal corporation law for this coun- 
try has, by no means, gone unrecognized; but such bills, 
as have sought to provide for this, have quite generally 
failed of passage in Congress because of doubtful consti- 
tutionality. 

Sphere of Activity. — The corporation, like the federal 
government, possesses only delegated powers. It may do 
only those things, and enjoys only such powers and rights 
as have been specifically delegated to it in the charter. A 
corporation that has been granted a charter empowering 
it to go into the coal-mining business, may not subsequently 
extend its field of operations to the manufacture of steel 
or to railroading. It must confine its business to that 
specifically designated and defined in its charter. Further- 
more, a charter granted by one state to a corporation gives 
it no rights in any other state. The clause in the Federal 
Constitution prohibiting any state from passing a law deny- 
ing to the citizens of any state the same rights and privi- 
leges as enjoyed by the citizens of the several states, is 
held by the Supreme Court, in the case of Paul v. Virginia, 
not to apply to corporations, because corporations, although 
they are persons, are not citizens. Any state may, there- 



114 SECURITIES-ISSUING ORGANIZATIONS 

fore, place cumbersome restrictions on foreign corporations ; 
that is to say, on those chartered by other states. The 
same rule applies also to alien corporations holding charters 
granted under the laws of foreign nations. Of course, the 
principle of mutual reciprocity is quite generally followed 
in the treatment accorded by any legal jurisdiction to the 
corporations of others. Indeed, without the general appli- 
cation of this principle in the United States, great diffi- 
culties would attend the use of the corporation for business 
purposes whenever its activities stretched out beyond the 
borders of the state that granted the charter. However, 
the limited sphere of activity inherent in the corporate form 
of organization is more theoretical than real and, as we 
shall see later, it does not, in practice, become a serious 
obstacle to its general use. 

Ownership and Liability. — Those persons, whether 
natural or artificial, whose names appear on the books 
of the corporation as owners of shares of its stocks are the 
entrepreneurs of the business. As entrepreneurs they have 
a claim on the unencumbered assets of the corporation, 
but no title to its property. This is held by the artificial 
person of the corporation itself. As a result of such an 
arrangement there is a double aspect to the question of 
assumption of risk or liability. The corporation itself 
assumes unlimited liability, for all of its property may 
be taken to satisfy the claims of its creditors. Among 
these creditors we may rightfully place the stockholders, 
who on dissolution, are entitled to that balance of the 
assets remaining after all debts have been paid, each stock- 
holder sharing according to the extent of his holdings. But 
the stockholders, themselves, as entrepreneurs, also assume 
liability. Under common law this was unlimited, but in 
practice it was frequently unenforceable upon each in- 
dividual stockholder because of practical difficulties. The 
principle of limited liability which now applies to stock- 



THE CORPORATION — CHARACTERISTICS 115 

holders is of statutory origin. It made its appearance in 
England during the decade 1850-1860, but is found much 
earlier in the United States. In New York it is encountered 
as early as 1811, in Connecticut in 1817, and in Massachu- 
setts in 1829. Under it the stockholder is liable only up 
to the face or par value of the stock that he holds. But in 
many states it is now possible, through the use of treasury 
stock, to restrict it still further, namely, to what the stock- 
holder has actually contributed to the corporation, even 
though this may be but a fraction of the par value of his 
stock. It is this principle of limited liability, more than 
any other, that is responsible for the bad repute that has 
attached itself to the corporation in America. Of recent 
years some states, notably California and Minnesota, have 
attacked this problem by providing for double liability 
under which the stockholder must pay the full par value of 
the stock to the corporation, and in case of bankruptcy, if 
the liabilities exceed the assets, he may be called upon 
to contribute an additional amount up to the limit of the 
par value of the stock that he holds. Double liability 
applies quite generally to stockholders of banking corpora- 
tions throughout the United States ; but for business corpo- 
rations it is restricted to the two mentioned states. 

Direction and Control. — The direction and control of 
the corporation is vested in the stockholders and the direc- 
tors, while the actual conduct of its daily business affairs 
is a duty imposed upon its officers and employees. 

The stockholders direct the policies of the corporation 
only when acting as a properly organized body, through the 
exercise of the voting power vested in them by virtue of the 
stock that they own. For this purpose, each share ordi- 
narily is assigned one vote on each proposition placed be- 
fore the stockholders. It requires a majority of votes 
to carry a proposition. The stockholders, while they 
do determine the broad general policy of the corporation, 



116 SECURITIES-ISSUING ORGANIZATIONS 

have, as stockholders, no share in directing the ordinary 
affairs of the corporation, but elect for this purpose, at an 
annual meeting, from among their number a board of 
directors, for which they may prescribe rules of conduct in 
the form of by-laws. 

The board of directors is entrusted with the conduct of 
the business, including the distribution of the income. They 
are responsible to the stockholders and the creditors for 
any losses resulting from misconduct or violation of law or 
charter powers of the corporation. 

Officers, such as a president, vice-president, secretary 
and treasurer, are chosen by the board of directors. They 
are the agents through which the corporation conducts its 
daily business. To assist them in their work, they employ 
such other persons as they deem necessary. 

The whole scheme or organization for purposes of direc- 
tion, as found in the corporation, resembles very closely the 
representative type of government common to the United 
States. The stockholders may be viewed as the body of 
citizens, the directors as the legislature, and the officers as 
the administrative officers of the state. The chief differ- 
ence between them lies in the method of choosing the offi- 
cers. The officers of the state are elected directly by the 
people, while those of the corporation are chosen by the 
directors. ^ 

Permanence and Stability. — One of the most charac- 
teristic features of the corporation is its remarkable sta- 
bility, the result of its continuity of existence. The term 
of life of the corporation is determined by the charter 
granting powers, and is in no way dependent upon the life 
of natural persons. The early Corporations were, with few 
exceptions, chartered in perpetuity. Under such grants, — 
barring voluntary dissolution, bankruptcy, and dissolution 

2 While this plan quite generally prevails in the United States, it 
is not universal. 



THE CORPORATION — CHARACTERISTICS 117 

by court order for violation of law, — they may endure as 
long as the social order continues, even though they may 
never function as established businesses. Corporations 
may, even now, be chartered in perpetuity under the laws 
of the state of Delaware and a few others; but with these 
exceptions, this practice has been quite generally discon- 
tinued, not only in this country but also abroad. Under the 
present corporation laws of most of the American states 
and foreign countries, the term of the charter is from 
twenty to fifty years ; but, as a rule, such liberal provisions 
for renewal are made, that the set period of life may be 
looked upon as a provision designed to retain a firmer 
control over the corporation, than an absolute termination 
of its existence. 

Exclusive of expiration of the charter, the corporation 
may be dissolved and terminated through (1) voluntary 
action of the stockholders, (2) bankruptcy or insolvency, 
(3) by court decree in cases of violation of law and (4) 
by the state for default in complying with provisions of the 
grant. 

As a rule, in case of bankruptcy or insolvency, the assets 
of the larger corporations are not sold at auction as is 
customary in the case of personally owned enterprises, but 
the whole business is turned over to the creditors, who agree 
upon such financial readjustments as may be deemed neces- 
sary to put the business back on its feet. Such readjust- 
ments come technically under the subject of corporation 
finance and are called reorganizations. 

Onerous Obligations. — The obligations placed by law 
upon the corporation, while they may not be onerous, are, 
nevertheless, at times quite burdensome. These may be 
properly classified under three heads (a) reports, (b) taxes 
and fees, and (c) regulations governing the operation of 
the corporation. In Germany, England and a few other 
foreign countries, they may be considered as burdensome 



118 SECURITIES-ISSUING ORGANIZATIONS 

because of the comprehensiveness, the minute detail and 
exactness demanded in the required reports to the govern- 
ment and to the stockholders, because of the publicity re- 
quired, in matters of promotion, finance and operation, as 
well as because of the taxes and close adherence to strict 
rules of procedure. In the United States they are burden- 
some more because of their number rather than for the 
reason above given. An enumeration of the more impor- 
tant of these requirements to be found in the United States 
will suffice at this place to indicate their character. 

(a) Reports: 

1. Local tax reports — made to local subdivisions of the 

state. 

2. State tax reports — made to each state in which the 

corporation does business. 

3. Federal tax reports — made to the Commissioner of In- 

ternal Revenue, United States Treasury Department. 

4. Annual reports — made to the secretary of state in each 

state in which the corporation does business as re- 
quired by that state. They are for pubHc record. 

5. Sundry reports — made by corporations engaged chiefly 

in public service enterprises to state service commis- 
sions and to the Interstate Commerce Commission. 

6. Special reports — made to the Federal Trade Commis- 

sion as required by it. 

(6) Taxes: 

1. Organization taxes payable to the chartering state. 

2. Annual franchise taxes payable to each state in which 

the corporation does business. 

3. General property tax payable to the subdivisions of 

the state in which the property is located. 

4. Inheritance taxes payable to a few states and to the 

federal government. 



THE CORPORATION — CHARACTERISTICS 119 

5. Income taxes payable to some states and to the fed- 

eral government. 

6. Other taxes and fees such as a stock transfer tax, re- 

cording fees, transcribing fees, etc., payable to the 
state and in some cases also to the federal gov- 
ernment. 

(c) Regulations governing operation: 

These include such requirements as notices of annual 
and special meetings of stockholders, notices of direc- 
tors' meetings, and the declaration of dividends, etc.; 
as to the kinds of books and accounts that shall be 
kept, and as to annual reports to stockholders, etc. 

Classification of Corporations. — Not all corporations 
exhibit the -same features in their organization. There is 
no general stereotyped form that serves equally well for all 
purposes. The corporation has been put to such a great 
diversity of uses that it became advisable to classify them 
for legal and legislative purposes. 

The first basis of classification rests upon the object for 
which the corporation is to be formed. Three such objects 
have become generally recognized. First, the corporation 
is found to be very useful in organizing for governmental 
purposes, as cities, counties, towns, school districts, and 
other political subdivisions of the state. These are known 
as municipal corporations. Not being organized for profit, 
they issue no stock, but may, and usually do issue bonds. 

The second class is distinguished by its social, rather 
than political object. It includes churches, schools and 
libraries, clubs, lodges and fraternities, and charitable or- 
ganizations. Here also, the object is not private financial 
gain or profit, but an intangible social benefit. This bene- 
fit cannot be measured, and consequently the corporation 
has no use for stock, which serves merely as a conven- 
ient medium whereby to distribute the benefits that accrue 



120 SECURITIES-ISSUING ORGANIZATIONS 

to the participants. This type is called eleemosynary 
corporations. 

The third class includes all corporations organized for 
profit. These are commonly referred to as business corpo- 
rations. They all issue stock, and usually also bonds. For 
purposes of greater effectiveness of control through statutes, 
they are grouped according to the field of their operations 
as industrial, commercial, public service and financial cor- 
porations; and in each of these groups are several types. 



Classification of Corporations 

A. Non-stock corporations 



1. Municipal 



cities 
counties 
school districts 
towns, etc. 



f churches 
hospitals 
Eleemosynary { schools and libraries 

clubs, lodges and fraternities 
charitable institutions 



B. Stock Corporations 



3. Business 



Industrial 



Commercial 



Public 
Service 



Financial 



f Manufacturing 
\ Mining 

f Wholesaling 
\ Retailing 

Railroads 
Street railways 
Gas, heat and light companies 
Telephone and telegraph 
companies 

Banks 

Trust companies 

Insurance companies 



Advantages and Disadvantages. — From the foregoing 
brief description of the corporate form of organization, 



THE CORPORATION — CHARACTERISTICS 121 

its advantages and disadvantages, as they present them- 
selves to the entrepreneur, have become apparent. 
Its advantages may be summarized as follows: 

(1) Flexibility. It lends itself as readily to small as to 
large undertakings because the numbers of entrepreneurs 
or owners that may participate in it can be large or small; 
its business operations can readily be contracted or ex- 
tended through the simple expedient of charter amendment, 
and it has within easy reach the vast reservoir of the in- 
vestable capital of nations, which enables it to collect large 
amounts of capital in the form of small contributions from 
a great number of investors. 

(2) Stability and permanence. Unlike the personal 
ownership types of entrepreneurial organization, its be- 
ing is not dependent upon the lives of the entrepreneurs nor 
yet subject to their capricious whims, but it enjoys a defi- 
nite term of life which, at its expiration, is easily extended. 

(3) Transferability of ownership interest. The quality 
of transferability inherent in the securities that it issues, 
makes it possible for the entrepreneur easily to withdraw 
from the enterprise without in the least disturbing the or- 
ganization. There is usually a ready market for the stock 
in large or small quantities. 

(4) Limited Liability. The entrepreneur can definitely 
predetermine and limit the risk of loss that he assumes. 
This he cannot do under the personal ownership types, or 
even under the joint stock company. 

(5) Centralized control. The personal ownership types 
of organization do not permit of the association of a large 
number of entrepreneurs in a single enterprise, nor do they 
offer the same facility in attaching specialists to the busi- 
ness through the entrepreneurial bond. The corporation, 
however, does offer these opportunities, and in addition it 
furnishes the mechanism whereby the control of the 
greatest and most ramified undertakings may be cen- 
tralized in the hands of a relatively small group. 



122 SECURITIES-ISSUING ORGANIZATIONS 

The disadvantages also have been touched upon. They 
are here briefly summarized. 

(1) Government regulation. The corporation as a 
creature of the state is subject to constant regulation. This 
in itself would not be a serious disadvantage were it not 
for the fact that at practically every session of the state 
legislature existing laws and regulations are changed, or 
entirely new ones adopted. The policy of states in this 
respect shifts from laxity to aggressive regulation and re- 
striction according to prevailing public sentiment. Hence, 
it is impossible to forecast from one year to the next what 
these regulations will be. 

(2) Greater burden of fees and taxes. The corporation 
must pay to the states in which it operates and to the 
federal government many kinds of taxes and fees from 
which the personal ownership types of organization are 
exempt. Not least among these is the initial expense of the 
organization tax and the annual franchise tax which it must 
pay to continue its existence. 

(3) Restricted sphere of activity. The corporation may 
do only those things that it is specifically authorized to do, 
while the entrepreneurs in the personal ownership organiza- 
tions may do anything that is not specifically prohibited. 
The former operates by permission and the latter by right. 

(4) Limited credit. In theory the limited liability en- 
joyed by the stockholder of a corporation should work to 
restrict the credit that may be extended to the corpora- 
tion to an amount determined very largely by the selling 
value of the assets or the capitalized net earnings. Other 
things being equal, the same business, where operating 
under a corporate form, should not enjoy the same high 
credit standing that it would have as a partnership. But 
in practice, this theory does not always hold; and fre- 
quently, in spite of the limited liability, the corporation 
has a better credit standing than a partnership would have. 



THE CORPORATION - CHARACTERISTICS 123 

This is more particularly true of corporations operating 
large undertakings whose bond issues often exceed the sell- 
ing value of the properties under their control. For ex- 
ample the old United States Shipbuilding Company issued 
$24,500,000 in bonds against assets valued at less than 
$16,000,000.^ 

3 Dewing, Corporate Promotions and Reorganizations. 



CHAPTER VIII 

CORPORATE SECURITIES AND CAPITALIZATION 

The Corporate Securities 

General. — The corporate securities, like all types of 
securities, are of two general classes, namely, those that 
represent an ownership interest in the business, and those 
that represent a creditor's interest. The former are called 
stocks and the latter notes and bonds. Of each class, there 
are numerous kinds exhibiting all shades of characteristics 
that permit of gradual gradation from stocks to bonds ; but 
there is, nevertheless, a fairly well recognized line of cleav- 
age between them 

Capital Stock. — The number of shares of stock that the 
charter authorizes the corporation to issue is its capital 
stock. It is usually expressed in terms of money, in which 
case the charter will further state the number of shares 
into which it is divided. Thus we find in the charter of 
the Midvale Realty Corporation the following clauses: 

"Third. — The amount of capital stock of said corporation 
shall be One Million Dollars ($1,000,000). 

Fourth. — The number of shares of which said capital stock 
is to consist shall be Ten Thousand (10,000) shares of the par 
value of One Hundred Dollars ($100) each." 

Such shares are said to have a par value, that is, a nominal 
value assigned to each share. A common practice is to 
assign a par value of $100 to each share, but this is a 
matter of choice within the limits fixed by provisions of 
law. The shares of stock of the Pennsylvania Railroad 

124 



THE CORPORATION — SECURITIES, ETC. 125 

have a par value of $50, while those of the Carnegie Steel 
Company were $1,000 each. Under the laws of the state 
of New York the par value must be $5, or multiples of that 
figure, which permits of considerable variation in this 
matter. Other states permit of the issue of stock of a 
nominal par value; for example, the Wind River Refining 
Company, a Maine corporation, has a share with a par 
value of only one mill. 

In many of the states it is now permissible under statute 
law, to state in the charter merely the number of shares of 
which the capital stock is to consist, without assigning to 
each share any par or nominal value whatever. These 
shares are known as shares without par value, or non-par 
value shares. A good example of such a law is that of 
New York. This type of share is rapidly gaining favor, 
for, as one writer ^ puts it, ^' It is argued that such shares 
lacking the ' price ticket ' of a nominal value, will force the 
investing public to investigate the real value of the 
enterprise and the real probability of profits, and thus de- 
termine the real value of the shares much more surely 
and quickly than under the present system of valued 
shares." In most states, the incorporators are not restricted 
to the exclusive use of either the one type or the other, 
but may use both. 

Issued and Unissued Stock. — The stock of the 
corporation does not, merely by virtue of a charter 
provision authorizing it, exercise an effective claim on 
the income of the corporate business. To do so it 
must be sold by the corporation, or be given in ex- 
change for services or property. By this means does 
the corporation make connection with entrepreneurs 
who are called stockholders. The stock that is so given 
out by the corporation is called issued stock, while the bal- 

1 Thomas Conyngton, Corporate Organization and Manage- 
ment, p. 70. 



126 SECURITIES-ISSUING ORGANIZATIONS 

ance of the authorized capital stock is unissued. The 
United States Steel Corporation began life with an 
authorized capital stock of $1,100,000,000; and at the end 
of the first year had issued $1,018,583,600, the difference 
being unissued. The unissued stock forms a reserve which 
may be sold on the market to secure additional funds or 
may be otherwise disposed of as the stockholders may see 
fit, so long as they remain within the law. 

The Stock Certificate. — The instrument that is placed 
in the hands of the stockholder as an evidence of his owner- 
ship of issued shares of stock is the stock certificate. It 
usually sets forth the name of the corporation, the state of 
incorporation, the authorized capital stock, the par value 
of the shares, the name of the holder, the number of shares 
represented by the certificate, requirements as to transfer 
of ownership, the date of issue, the number of the certifi- 
cate and the signatures of such officers of the corporation 
as may be required by the charter or by-laws. If the 
stock possesses any special feature, these are usually also 
printed on the face of the certificate. On the back of each 
certificate is a form to be filled in to effect a transfer of 
ownership.^ 

Full-Paid and Part-Paid Stock. — If the corporation, in 
exchange or payment for its stock, has received money, 
property or services whose fair market value, in the best 
judgment of the directors, equals the face value of the 
stock, then the stock is said to be full paid. The corpora- 
tion ordinarily also gives up any privilege it might have of 
levying assessments upon the stockholder in case it gets 
into difficulties. Most stock is issued as full paid and non- 
assessable, by virtue of which the stockholder's liability 
toward the corporation will have been satisfied in full. It 
frequently happens, however, that stock is issued as full 
paid and non-assessable, when in fact the corporation may 
2 See Forms 21-24, Part VI. 



THE CORPORATION — SECURITIES, ETC. 127 

not have received for it anything approaching the par 
value of the stock. In such cases the liability of the stock- 
holder toward the corporation itself, in the absence of 
fraud, has been fully met, but the creditor of the corpora- 
tion, if he cannot satisfy his claim out of the corporate 
assets, may sue to recover from the stockholders sums equal 
to the difference between the actual value of what they paid 
the corporation for its stock, and the par value of their 
shares. To illustrate: If stock that has a par value of 
$100 per share is sold by the corporation for $80 per share 
as full-paid and non-assessable, the corporation cannot 
subsequently demand the difference of $20 of the stock- 
holder, but the creditor of the corporation has a legal right 
to do so. When property or services have been given in 
payment for the stock, the corporation is entitled to exer- 
cise its judgment as to the reasonable value of the property 
or services received. When such stock is issued it is some- 
times hard to prove that the stock is not full paid. Stock 
of this character, that has been issued without the receipt 
of an adequate supporting value by the corporation, is 
commonly called watered stock. In several of the states 
the directors, whose duty it is to issue stock, are made per- 
sonally liable, not only to the creditors, but also to the 
corporation for the issuance of part-paid stock.^ 

A stockholder who is not the original subscriber, but 
who has purchased stock for which the full par value was 
not paid, and the stock is marked full paid and non-assess- 
able, is not liable to creditors for the unpaid balance if he 
has no knowledge of the fact that it was not fully paid. 
The liability in such cases remains with the original sub- 
scriber, or is lost. If he has knowledge of the conditions 
under which it was issued he is liable. 

Treasury Stock. — Stock that has once been issued as 
full paid and non-assessable, when acquired by the issuing 

3 See the Laws of Vermont and New York. 



128 SECURITIES-ISSUING ORGANIZATIONS 

corporation by purchase, gift, bequest or exchange, is called 
treasury stock. Only in those states that permit a cor- 
poration to own its own securities is it possible to have 
treasury stock.^ Such stock, when again sold by the cor- 
poration for less than its par value, does not impose upon 
the purchaser a liability as in case of part-paid stock. 
This holds even as between the purchaser and the creditor 
of the corporation. This principle is frequently taken ad- 
vantage of in forming mining corporations. The owner or 
owners of a mining claim will form a corporation and ex- 
change the claim for all of the corporation's capital stock. 
In order to secure additional funds for development pur- 
poses, a large block of the stock is given back to the cor- 
poration, which sells it for what it will bring. It is quite 
obvious that this practice, where permitted under state 
laws, makes a mere fiction of full paid stock. 

Stock Classification. — It is frequently deemed desira- 
ble by the incorporators to provide for several classes of 
stock. The bases of classifications of this kind are the risk 
factor assumed by the stockholder and the degree of con- 
trol that he exercises. A very common arrangement is to 
provide for two classes in the charter, namely, common 
stock and preferred stock. 

Common Stock 

The securities that vest in their holder title to the other- 
wise unencumbered or unpledged income and assets of the 
corporation, are called its common stock. Attendant upon 
its ownership is the assumption of the first risk of loss, 
arising from the fact that the holders of other securities of 
the corporation are given a preferred claim on income, and 
usually also on assets. The common stockholder's interest 
in the business of the corporation is thus in the nature of 
a final equity coupled with power of control. 

4 The laws of Missouri do not permit the corporation to own 
its own securities. 



THE CORPORATION — SECURITIES, ETC. 129 

Rights of the Common Stockholder. — The characteris- 
tics of common stock are perhaps best brought out by a 
consideration of the rights that become vested in a per- 
son by virtue of the ownership of a share of such stock. 
These include the following: 

(a) Voice in direction. For each share of common 
stock held by him, the stockholder is entitled to cast one 
vote on each proposition laid before the general body of 
stockholders, be it the election of directors or the deter- 
mination of some financial or other policy. This voice in 
the direction of the corporation is a right inherent in the 
entrepreneur and is alienable only with his consent. The 
right to vote may be exercised in person or may be dele- 
gated to another by execution of a power of attorney, 
called a proxy. 

(b) Notice of meetings of stockholders. To make 
effective his right to vote, the stockholder has furthermore 
the right to be notified of the time, place and purpose of 
meetings of the body of stockholders. 

(c) Information. As an entrepreneur, the common 
stockholder is entitled to inform himself of the condition 
of the business. He has the right to demand such financial 
and other reports as may be prescribed in the state laws, 
or in the charter and by-laws of the corporation. In addi- 
tion to this, he has a limited right to inspect the books of 
the corporation. Under common-law rules this last was 
an absolute right, but in modern practice it is generally 
limited to prevent the stockholder from interfering with 
the conduct of the business and from exercising the privi- 
lege for purposes other than of informing himself of the 
condition of the business. The reason for this restriction 
is obvious. If it were not imposed, what would prevent 
an officer of a competing corporation from purchasing a 
share of stock of his competitor and thereby enjoying the 
privilege of informing himself as to amount of its business, 



130 SECURITIES-ISSUING ORGANIZATIONS 

the location and names of its customers, etc.? The courts, 
in enforcing this right, usually look into the motive behind 
it rather than to the bare right itself. 

{d) Right to participate in profits. That part of the 
income of the business that remains as a surplus after all 
expenses and current creditors' claims have been paid and 
sufficient funds to keep up the assets of the business have 
been set aside, is ordinarily considered to be the net profit. 
This, in the corporation, belongs to the stockholders to be 
distributed on the basis of shares owned. The common 
stockholder has a claim on these profits only to the ex- 
tent to which they remain unpledged to other stockholders. 
The distribution of the profits can take place only by the 
declaration of dividends by the directors, but when divi- 
dends have once been declared the stockholder has a right 
to demand and to receive them from the corporation. They 
may not be withheld from him. Thus the right of the 
common stockholder to dividends, while it cannot be 
denied, is contingent upon the satisfaction of all prior or 
preferred rights. 

ie) Right freely to dispose of shares. Since one of the 
inherent characteristics of securities is that they are freely 
transferable, the common stockholder enjoys the right to 
sell, give, devise or bequeath his shares of stock to another. 
Such a transfer carries with it all rights, privileges and 
preferences enjoyed by the transferer by virtue of owner- 
ship of shares. 

The Stockholder's Liability. — The liability arising out 
of the ownership of stock of a corporation has been indi- 
cated here and there. It may be well at this point to sum- 
marize it. 

1. His liability is limited and is easily measured. 

2. He may lose up to the par value of stock subscribed for and 

purchased or what he has actually paid for non-par value 
stock. 



THE CORPORATION— SECURITIES, ETC. 131 

3. He may be called upon to pay to the creditors of the corpo- 
ration the unpaid balance on part-paid stock. 

4. He may be called upon to pay to the creditors a sum equal 

to the par value of the stock that he holds if he holds 
stock in national or state banks. 

5. He can be forced to reimburse the corporation or its credi- 

tors for any dividends paid out of assets or declared when 
the corporation was insolvent. 

6. He is liable, in most states, for his proportionate share of 

wages owed to employees in case of insolvency. 

Classification of Common Stock. — Although not very 
general, classification of common stock is sometimes re- 
sorted to. For example, two classes might be made. Class 
A consisting of a given nmnber of shares and entitled to 
elect two members to the board of directors, and Class 
B entitled to elect but one member to the board of direc- 
tors. Such classifications are frequently employed to in- 
sure control on the same basis that existed in a partner- 
ship when it is transformed into a corporation to secure 
the advantage of the latter form of organization. Classi- 
fication of common stock by large corporations is ex- 
tremely rare as it tends to give a preference that can be 
better and more minutely expressed by means of pre- 
ferred stock. 

Preferred Stock 

Stock that is distinguished from the common stock of 
the same corporation by conferring upon the holder special 
or preferred rights, not enjoyed by the common stockholder, 
is called preferred stock. It is the generally accepted rule 
that preferred stock vests in the holder all of the rights 
that he would possess as a common stockholder, and in 
addition thereto such rights and privileges as are specifi- 
cally conferred, together with such restrictions as may 
be imposed upon him under the charter provisions creating 



132 SECURITIES-ISSUING ORGANIZATIONS 

the class of preferred stock that he owns. It is essentially 
common stock with certain definitely described privileges 
and restrictions added. 

From what has been said of the rights of the common 
stockholder, it is plain that a great many varieties of pre- 
ferred stock can be brought into use. However, in practice 
this does not seem to have been the general result. A few 
more or less standardized types, based quite largely upon 
preference as to dividends and assets, have been widely 
used; but only occasionally are types with distinctive fea- 
tures other than these found. The following examples of 
preferences and restrictions, while by no means exhaus- 
tive, indicate the characteristics of the more common types 
of preferred stock. 

Preference as to Dividends. — Preferred stock may be 
given preference as to dividends alone by some such clause 
as this: "The holders of the preferred stock shall be en- 
titled to receive, when and as declared, from the surplus 
or net profits of the corporation dividends at the rate of 
seven per centum and no more." Such stock possesses three 
distinctive features; first, its holder must receive dividends 
before the common stockholder is entitled to any; second, 
the dividend must be equal to seven per cent of the par 
value of the stock, and third, it cannot exceed seven per 
cent even though enough profits remain to declare dividends 
of more than seven per cent on common stock. Further- 
more, the directors are under no obligation to declare divi- 
dends annually, but may allow earnings to accumulate so 
that when dividends are declared the common stockholder 
may receive far more than the preferred stockholder. 

If, however, the word " annual " be inserted before the 
word " dividends," the result would be to require the di- 
rectors to declare dividends annually, if earned, and the 
preferred stockholder should under good management re- 
ceive his seven per cent annually. 



THE CORPORATION — SECURITIES, ETC. 133 

If a further change is made by striking out the words 
" and no more," the seven per cent would become a mini- 
mum instead of a maximum dividend rate, and the pre- 
ferred stockholder would participate in dividends if the net 
earnings permitted of a dividend of more than seven per 
cent on both preferred and common stock. Both classes 
would receive the same rate in that case. Thus the words 
" and no more " make it non-participating preferred stock. 

Frequently it is found desirable to assure the preferred 
stockholder of a specified annual rate of dividend on the 
par value of his stock by providing that " if in any year 
the stipulated dividend rate shall not have been paid, the 
deficiency shall be payable before any dividends shall be 
paid or set apart for the common stock." In other words, 
the preferred stockholder's claim to a stipulated dividend 
on his stock does not run from year to year, but if not| 
satisfied in any year carries over from one year to the next 
and so on until it is finally paid. This type of preferred 
stock is called cumulative. 

Preference as to Assets. — Preference to share in assets 
upon dissolution of the corporation is frequently given to 
preferred stock, particularly to the cumulative type. The 
two preferences combined make a very useful stock because 
of the relative ease with which it can be sold on the mar- 
ket or be given in exchange for properties or stocks of 
corporations that are to be consolidated or combined. 

Voting Power. — Preferred stock is frequently denied the 
right to vote on the theory that the preference granted is 
sufficient to compensate the holder for giving up his right of 
control. Frequently a contingent voting power is conferred, 
by which the preferred stockholders are empowered to 
supplant the common stockholders in the control of the 
corporation whenever the earnings are insufficient to pay 
the preferred dividends in full. The control then remains 
in the hands of the preferred stockholders until all ac- 



134 SECURITIES-ISSUING ORGANIZATIONS 

cumulated dividends have been paid, when it reverts to 
the common stockholder. In other cases, the preferred 
stockholders are given the right to elect a certain number of 
members to the board of directors, for example, one or two 
of a board of five. Still another arrangement that is some- 
times resorted to, is to give each of the two classes of com- 
mon and preferred stock equal voting power, regardless 
of the number of shares of each that are outstanding. It 
may also be provided that no mortgage or other encimi- 
brance shall be created without the consent of a substan- 
tial majority of the outstanding preferred stock. 

Other Features. — Incorporators frequently provide for 
the issue of preferred stock as a temporary loan. In such 
cases it is issued with the proviso that it may, at the will 
of the directors or common stockholders, be redeemed or re- 
tired by the corporation upon payment of the par value, 
plus ten to fifteen per cent, and all accrued dividends. A 
sinking fund based on a percentage of the par value of the 
outstanding preferred stock, may be provided for purposes 
of redemption. This type is called redeemable preferred 
stock, and also frequently debenture stock, as in the General 
Motors Company. 

Another practice is to issue it subject to conversion into 
any other security, such as bonds or common stock, that 
may be considered more attractive to the investor. Such 
stock is known as convertible stock. 

Preferred Stock of No Par Value. — While stock with- 
out par value is usually common stock, it is permitted, 
under the laws of a few states, to issue preferred stock with- 
out par value. This has been made possible only within 
the last few years, and as yet little of this type of stock 
has been employed in corporate capitalizations.^ 

5 Descriptions of examples of preferred stock actually in use that 
combine one or more of the features described above are given 
in Part VI, in Forms 19 to 23, and should be carefully studied 
by the student so that he may familiarize himself with the way 
in which these features are combined in practice. 



THE CORPORATION — SECURITIES, ETC. 135 

Founders' Shares. — In England a special kind of pre- 
ferred stock known as " founders' shares " has been fre- 
quently employed in order to favor those who launch, or 
are among the first to invest in, the new corporate enter- 
prise. The preference given the holders of founders' shares 
is usually based on a given per cent of the sum total of 
net earnings available for distribution as dividends on 
common stock. For example, a corporation with an 
authorized capital stock of $500,000 has $150,000 in pre- 
ferred stock and $350,000 in common stock. Of the latter, 
$50,000 are in founders' shares the holders of which are 
entitled to receive one-third or one-half of the distributable 
net-profits remaining after every class of security-holders, 
other than common stockholders, has been satisfied. In the 
United States little use has been made of this type of 
security. The reason for this is twofold. In the first place, 
the same classification of security-holders may be secured 
by means of carefully selected types of preferred stock, 
and secondly, the laws of our states have not been suffi- 
ciently interpreted by the courts to insure the validity of 
issues of founders' shares. The laws of New Jersey and 
many other states, however, would seem to permit of their 
use, and at least one large corporation, the United Retail 
Stores Company, organized within the past few years 
has employed founders' shares with considerable success. 
Founders' shares are frequently made redeemable. This 
practice is common in France. 

Bonds and Corporate Notes 

The corporate bond is a security to which attaches a 
creditor's interest in the corporation carrying with it a 
claim on income and property. It is distinguishable from 
stock, in that its holder ordinarily exercises no control 
through voting power over the business so long as the 
corporation meets its obligations to him as they fall due. 



136 SECURITIES-ISSUING ORGANIZATIONS 

The risk of loss assumed by the bondholder is, in theory, 
and usually in practice, relatively less than that assumed 
by the stockholder; but, as the intensity of this factor is 
dependent upon the nature of the support back of the in- 
terest and principal of the loan, here th^ same characteris- 
tic of gradation as found in preferred stock also applies. 
Thus, while in principle, a clear distinction or line of cleav- 
age is seen to differentiate bonds from stocks in the matter 
of claim on income, risk assumed and control exercised by 
the holder, in practice these distinctions are reduced from 
the absolute to the relative. The result is the existence 
of a serrated scale of securities, ranging from conmion 
stock at one end to mortgage bonds at the other, permit- 
ting of all degrees of differentiation in respect to claims on 
income and assets, risk and control. 

Structural Elements of the Bond. — In order to under- 
stand clearly just what place the bond occupies among the 
corporate securities and w^hat rights, privileges and powers 
the bondholder enjoys in the corporation, it will be neces- 
sary to analyze the elements that determine the character 
of any bond. Five such structural elements enter into the 
construction of every bond, namely, (1) the nature of the 
covenant creating the bondholder's claim on income and 
assets; (2) the nature of the supporting value back of the 
principal; (3) the manner in which payment of interest 
and principal is to be made ; (4) the nature of the power of 
foreclosure and assumption of control, and (5) the purpose 
for which the bond has been issued. 

By no means is each of the enumerated elements em- 
ployed in the building of every bond in exactly the same 
way, or with the same degree of importance or emphasis. 
From this it follows that the variety of bonds that may be 
issued is exceedingly great; but as in the case of preferred 
stock, the bond issues have in practice been quite largely 
confined to a few more or less common types, a factor 



THE CORPORATION — SECURITIES, ETC. 137 

that favorably influences their vendibility. The possibili- 
ties in the matter of varieties of each well recognized type 
are made apparent through a brief explanation of the ele- 
ments that have been enumerated above. 

1. The covenant creating the bondholder's claim on the 
income and assets of the corporation is a legal instrument 
called the indenture. Broadly speaking, there are two 
classes of bond indentures, namely, the mortgage deed of 
trust and the debenture, each of which gives name to a 
class of bonds. 

If the covenant is in the nature of a mortgage it con- 
veys title to the property supporting the bond issue to a 
trustee, to be held by him in trust for the benefit of the 
bondholders who become the beneficiaries. The stock- 
holders, however, retain their power of control over the 
corporation, which remains in full possession and enjoy- 
ment of the property as long as the claims of the bond- 
holders are faithfully and regularly satisfied. In addition 
to containing sections on these points, the covenant also 
contains an introduction giving the names of the parties 
and the legal status of the corporation, together with a re- 
cital of its authority to incur bonded indebtedness, and 
also sections describing the bond certificate, rate of interest, 
date of redemption, and in the fullest detail, the property 
that is pledged in support of the mortgage, requirements 
as to insurance of this property, a statement of the securi- 
ties of subsidiaries, if there are any, and a section dealing 
with foreclosure and control in case of default. Some of 
these mortgage trust deeds attain considerable length, es- 
pecially in the case of railroad corporations, some of whose 
indentures would make a fair sized book if printed and 
bound. 

The debenture, unlike the mortgage bond, does not con- 
vey in trust any specific property of the corporation, but is 
very much like an unsecured promissory note. The holders 



138 SECURITIES-ISSUING ORGANIZATIONS 

of debenture bonds, thus, in so far as their claim on the 
assets of the corporation in case of insolvency is concerned, 
are on the same level as general creditors. They have been 
little used in this country, but constitute the chief type of 
creditor securities issued by the English railway companies. 

2. The nature of the supporting value back of the prin- 
cipal of the loan is, in final analysis, the determinant of the 
real value of the bond. In the case of the mortgage bond 
the supporting value is the real and personal property 
specifically described in the deed of trust. When it in- 
cludes all of the property of the corporation the bond is 
called a general mortgage bond, and when but a part of it, 
as for example a single division of a railroad or a freight 
or passenger terminal, it is a special mortgage bond. The 
amount of property pledged is also important ; if it is fixed, 
it limits the amount of bonds that may be issued, and if 
it is permitted to bring additional property under the 
mortgage, the bond issue may be extended. Out of this 
feature, coupled with variations in the method of issue, 
spring three types of mortgages; (1) the closed, under 
which the amount of bonds is fixed and all must be issued 
at one and the same time; (2) the open-end, authorizing an 
indefinite amount of bonds to be issued as needed under 
certain restrictions, and (3) the limited open-end, authoriz- 
ing a maximum amount of bonds but permitting them to 
be issued as needed. The first and third are quite common 
with railroads and industrials, while the second type has 
been used at times — but infrequently — by railroads. 

When the supporting value consists solely of the securi- 
ties of other corporations the bonds are called collateral 
trust bonds; when of equipment, such as the rolling stock 
of railroads, equipment trust bonds; and if they are issued 
to secure money to purchase property, and are to be se- 
cured by the property to be bought, they are purchase- 
money bonds. Sometimes, however, the supporting value 



THE CORPORATION — SECURITIES, ETC. 139 

is not specifically designated, as in the debenture, in which 
case no preferred claim on the property of the corporation 
vests in the bondholder. Several issues of bonds may be 
supported by the same property in which case they are 
designated as " first " or " second " mortgage bonds. 

3. The manner in which payment of the interest and 
principal is to be made is also a factor determining the 
character of the bond. Upon it depends the procedure 
that the corporation is obliged to follow in meeting its 
bonded debts. 

The rate of return, or earning power of the bonds, is the 
rate of interest that it bears. This is usually expressed as 
a fixed per cent of the amount of the prinicpal. Due to 
the relatively lighter risk of loss assumed by the bond- 
holder, this rate is ordinarily les^ than the prescribed divi- 
dend rate of preferred stock. While the latter is commonly 
set at seven or eight per cent of the par value, the former 
is most frequently five or six per cent per annum. It consti- 
tutes a fixed charge against the income of the corporation, 
and except in the case of income bonds, it may not bei 
carried over from year to year but must be paid when it 
falls due. The rate is usually an annual rate, but payment 
is in semi-annual or by other time installments. Bonds 
may be made participating by providing that any income, 
more than sufficient to pay the interest on the bond and a 
like dividend on stock, shall be distributed on an equal 
percentage basis to the two classes of security holders. 

The principal is the sum total of the outstanding bonds, 
each bond being a fractional part of this amount expressed 
in terms of money. The principal represented by a single 
bond is more frequently $1,000 than any other sum. Two 
methods of payment are in use, the sinking fund and the 
serial. Under the former the entire issue of bonds must 
be redeemed at the expiration of the fixed term of years 
for which the loan runs, but frequently the issue may be re- 



140 SECURITIES-ISSUING ORGANIZATIONS 

deemed in part at a premium at the option of the 
directors of the corporation upon due notice to the bond- 
holder. Under the serial plan the maximum time limit of 
the loan is fixed and regulaT redemption dates fixed so that 
the entire issue will be redeemed in equal installments, the 
last on the expiration date. Thus, we may have serial 
bonds issued for a ten-year period, one-tenth to be re- 
deemed at the expiration of each year. The bonds that are 
to be paid are chosen by lot. Bonds are profit-sharing 
when the bondholder is entitled to a share of the increase 
in value of the pledged property accruing during the life 
period of the bond. 

The interest and principal may be made payable in 
gold in which case the bond is called a gold bond. 

4. The power of foreclosure and the assumption of control 
may become exercisable by the bondholder under several 
conditions, the most important being the failure of 
the corporation to pay the interest on the bonds as 
due, and its failure to pay the principal at the ex- 
piration of the loan. Under most mortgage bond in- 
dentures, foreclosure may be had upon the advent 
of either of the two contingencies, and the same thing 
applies generally to debenture bonds. In the case 
of income bonds, however, the lapse of an interest pay- 
ment does not give the bondholder the right to exercise 
this power but he may do so only on failure to pay the 
principal. This is so because the only support back 
of the interest of the income bond is the annual income 
of the corporation, while in the mortgage bond it is the 
mortgaged property which in both cases also supports the 
principal. 

In most bond indentures is inserted a provision granting 
the corporation a period of grace in which to make pay- 
ment of interest and principal before the bond holders take 
over the control. This period is most frequently the same 



THE CORPORATION— SECURITIES ETC. 141 

as the regular dividend interval, that is to say, six months.® 
When the bondholders take over the control the stock- 
holders usually step out and appoint a committee to look 
after their interests. It is customary for the bondholders 
to buy the property of the corporation when this is sold at 
auction to meet the debts. Another course of procedure 
is to reorganize the corporation by means of readjusting 
its capital in such a way as to reduce the amount of out- 
standing securities. This results in either dropping the 
common stockholders or in materially reducing their 
holdings. 

5. The purpose for which the bond is issued frequently 
gives name to the issue. Thus, we find " refunding," 
" construction," " unifying," " extension," " improvement," 
*' consolidated " bonds, etc. 

Short Time Notes. — It sometimes happens that the 
corporation may be temporarily in need of funds; or that, 
while a bond issue is necessary, the money market is not 
favorable for its sale. In such cases corporations fre- 
quently resort to the issuance of short time notes which have 
all the characteristics of the money paper or notes issued 
by proprietors of personally owned businesses. These short 
time notes, while they are not, strictly speaking, securities, 
differ only in the length of time that they run — usually 
from six months to three years — from debentures. Conse- 
quently they are now often included under that term. Un- 
usually large quantities of such notes were issued from 1918 
to 1920, due to stringent money conditions that made bond 
issues too costly."^ 

6 In Part VI, in Forms 27 and 28, are given brief descriptions 
of some representative types of bonds which the student should 
study carefully. 

'' See table on page 91 showing new securities issued in the 
United States. 



142 SECURITIES-ISSUING ORGANIZATIONS 

Use of Securities 

Classes of Securities Ordinarily Used. — It has thus far 
become apparent that a vast variety of securities may be 
created through the use of minute differentiations in the 
characteristics of the several major classes. This possi- 
bility naturally makes the corporation an extremely flexi- 
ble form of ownership organization. However, American 
corporations seldom employ more than two or three classes 
of stock. This is not so generally true of bonds, particu- 
larly with our railroads, where successive hypothecation of 
the property in whole or in part is the general rule, and 
where it is also common practice to retire one bond issue 
out of the proceeds of another. A few examples will serve 
to illustrate these points. 

The consolidated balance sheet (1919) of the United 
States Steel Corporation, which owns a great many sub- 
sidiary corporations, shows that the Steel Corporation itself 
had outstanding on December 31, 1919, 

Common Stock $508,302,500 

Preferred Stock (7% Cumulative) 360,281,100 

U. S. Steel 50 yr. 5% Bonds 230,709,000 

U. S. Steel 10-60 yr. 5% Bonds 176,393,000 

Bonds of Subsidiaries guaranteed by 

U. S. Steele (12 issues) 99,227,000 

But in addition to the above, the subsidiaries themselves 
had outstanding $431,342.50 in several classes of stock and 
$62,398,931.53 in bonds comprising some 33 individual 
issues. 

The Southern Pacific Railroad had outstanding on 
December 31, 1919, 

1. Common Stock $160,000,000 

2. S. P. R. R. Co. First Refund Gold 4's.*. . . 143,831,500 

3. S. P. Branch Ry. First Gold 4's 3,533,000 



THE CORPORATION — SECURITIES, ETC. 143 

4. S. P. R. R. (of Cal.) First Consol. Gold 5's 4,127,500 

5. Northern Railway First Gold 5's 4,751,000 

6. Northern California Ry. First Gold 5's. . . . 1,074,000 

7. Coast Line Ry. First 6's 700,000 

(The star indicates that these bonds were issued largely to 

supplant outstanding prior issues.) 

The practice of using a multiple classification of stock 
is perhaps more common in England than in any other 
country of the world. For example, Lever Brothers, Ltd., 
incorporated in Great Britain in 1894, is authorized to 
issue the following classes of stock: 

1. £ 4,000,000— 5% Cumulative First Preference 

2. £ 6,000,000 — 6% Cumulative " A " Preference 

3. £10,000,000 — 6% * ' " B " Preference 

4. £10,000,000 — 6% * " C " Preference 

5. £10,000,000 — 15% Cumulative Preferred Ordinary 

6. £10,000,000 — 15% Cumulative "A" Preferred Ordinary 

7. £10,000,000 — 20% Cumulative Preferred Ordinary 

8. £10,000,000 — 20% Cumulative "A" Preferred Ordinary 

9. £10,000,000 — 20% Cumulative " B " Preferred Ordinary 

10. £10,000,000 — 5% Cumulative Preferred Ordinary 

11. £10,000,000 — Ordinary. 

(The stars indicate that the per cent of dividend is left for 
determination at time of issue.) 

While these are representative examples of very large 
corporations, they are nevertheless typical illustrations of 
the use of various classes of securities. But hundreds 
of examples of smaller corporations might be cited where 
but a single class of stock and no bonds are used. 

Capitalization. — The term " capitalization " as cur- 
rently used with reference to corporations, presents a 
variety of meanings. Some writers on corporation finance 
define it as the face or par value of the stocks and bonds 
of the corporation. This definition, however, neglects to 



lU SECURITIES-ISSUING ORGANIZATIONS 

take into account that stock may be issued without par 
value, and also that not all of the securities authorized 
may actually have been issued and placed in the hands of 
persons who will give effect to their claim on income and 
assets. A better definition of capitalization is the total 
amount, at par value, of the securities issued by the corpora- 
tion plus the sum actually received by it for non-par value 
shares outstanding. This may be more briefly stated as 
" the obligation assumed by the corporation that arises 
from issued securities." 
A few examples will serve to make this definition clear. 

Case I. Where the corporation receives the full par value of the 
securities issued. ^ 

Securities Issued Value Received 

5,000 shares common stock , $500,000 

2,500 shares preferred stock 250,000 

250 Bonds @ $1,000 each 250,000 

$1,000,000 

In this case the capitalization equals the value received by the 
corporation in payment for its securities. 

Case II. Where the corporation receives less than the full par 
value for securities issued. 

Securities Issued Value Received 

2,500 shares common stock 



5,000 shares preferred stock ^ ' 

250 Bonds @ $1,000 each 250,000 

$750,000 

Here the common practice of giving away common stock 
with each share of preferred issued, has been followed. 
For two shares of preferred issued, a bonus of one share 

8 Unless otherwise stated the par value of stocks is assumed to 
be $100 per share. 



THE CORPORATION — SECURITIES, ETC. 145 

of common stock has been given the subscriber. As a 
result, a total of $750,000 in stock, at par, has been issued 
for $500,000, while the bonds have been sold at par. The 
capitalization of the corporation is, in this case, $1,000,000 
while the value received by it is but $750,000. Under these 
conditions the stock is said to be " watered." If the pre- 
ferred stock has preference as to assets as well as dividends 
the equity of the common stockholders in the property of 
the corporation is practically nothing and the value of 
the stock will be determined largely by its power to control 
the business policies. 

Case III. Where stock without par value is employed. 

Securities Issued Value Received 

2,500 shares without par value $100,000 

5,000 shares preferred stock . . '. 500,000 

250 Bonds @ $1,000 each 250,000 

$850,000 

The capitalization in this case would be $850,000, a sum 
exceeding the par value of the securities issued by $100,000 
which is the amount actually received for non-par value 
stock. If the non-par value common stock has been given 
away, the capitalization would be reduced by $100,000, 
but it would still be an obligation assumed by the corpora- 
tion, although it would have practically no equity in the 
property. 

Securities can, of course, also be issued for more than 
their par value in which case the difference between the 
capitalization and the assets constitutes surplus. 

The capitalization must appear on the balance sheet of 
the corporation on the liabilities side, balanced by assets. 
When non-par value stock only is issued, the offset for the 
stock liability is the sum or value received for it. The 
same is true in case full value is received for par value 
securities. But if par value securities have been issued 



146 SECURITIES-ISSUING ORGANIZATIONS 

for less than their par, this value must be inflated to make 
assets equal the liabilities. This inflation is taken care of 
in several ways. A much greater value than their real 
worth may be ascribed to the business plant and equip- 
ment, or items such as " patents," " rights," " franchises " 
or " good-will " may be inserted among the assets. The 
latter is the better accounting practice, because it indi- 
cates at a glance that the corporation has not received in 
tangible assets a value equal to the securities that it has 
issued. Such a condition does not necessarily indicate 
over-capitalization, for it may be that the intangible assets 
of patents, good-will, etc., are more than sufficient to make 
up the difference. This is well illustrated by the value 
of such patents as the telephone and such trade marks 
as " Uneeda " and " Wrigley's." Still a third method of 
handling an apparent excess capitalization of this charac- 
ter is to enter an item such as ^' discount on stock " or " dis- 
count on bonds " among the assets, but this is infre- 
quently encountered in practice. 

The following condensed balance sheet of the American 
Milling Company illustrates remarkably well the inflation 
of assets to offset capitalization. In 1912 patents, good- 
will, etc., were entered as worth $2,437,521 while in 1914 
no value whatever is ascribed to them. It had originally 
been inserted to inflate the assets. The reason for dropping 
the item from the balance sheet may be found by a com- 
parison of the capital stock items under liabilities for the 
two years. The outstanding capital stock has been re- 
duced by $2,795,576. 



THE CORPORATION — SECURITIES, ETC. 147 

American Milling Company 

Assets 1914 1912 

Real Estate, Buildings, Machinery, etc. $ 964,057 $1,013,039 

Investments 465 1,340 

Patents, good-will, etc — 2,437,521 

Deferred charges to expense 5,818 11,696 

Profit and loss deficit — 194,441 

Linseed business — 242,146 

Current assets 110,977 266,845 

Total assets $1,081,317 $4,167,028 

Liabilities 

Capital stock , . . $ 698,894 $3,494,470 

Bonded debt 139,000 128,000 

Profit and loss surplus 108,260 

Reserves 3,418 9,172 

Current liabilities 131,745 535,386 

Total liabilities $1,081,317 $4,167,028 

The total capitalization of the American railways for 
which complete statistics are available, will throw some 
additional light upon the general use of the several classes 
of securities common to this country. The following table 
shows the capitalization of all operating railways and their 
non-operating subsidiaries, but excludes switching and 
terminal companies. 

Capitalization of Railways in the United States on 
December 31, 1918 

{Thirty-second Annual Report on the Statistics of Railways 
in the United States) 

Actually Held by or 

Ownership Securities out-standing for company Totals 

Common Stock ... $7,052,291,302 $197,015,979 $7,249,307,281 

Preferred Stock... 1,794,425,212 11,384,543 1,805,809,755 

Total Stock .... $8,846,716,514 $208,400,522 $9,055,117,036 



148 SECURITIES-ISSUING ORGANIZATIONS 

Creditor Securities 

Mortgage bonds. $8,108,695,075 $1,007,224,563 $9,115,919,638 

Collateral trust 

bonds 849,716,189 27,187,120 876,903,309 

Income bonds .. 333,986,190 19,117,720 353,103,910 

Miscellaneous . . 993,242,271 18,885,850 1,012,128,121 

Equipment Bonds 320,916,764 50,744,063 371,660,827 

Total Bonds . $10,606,556,489 $1,123,159,316 $11,729,715,805 

Total Capital- 
ization $19,453,273,003 $1,331,559,838 $20,784,832,841 

The extravagant use of creditor securities is characteristic 
of our railways. In this respect they differ considerably 
from most industrial concerns who follow a more conserva- 
tive policy with regard to funded debt. 

Over-Capitalization. — Over-capitalization of a corpora- 
tion is that state in which the earnings of the corporation 
are for a period of years, more or less, consistently inade- 
quate to meet the current claims of its security holders on 
its income. These claims are charges against the earnings 
of the corporation. In the case of bonds they are usually 
fixed and not deferrable; for preferred stock fixed but 
deferrable, and for common stock contingent upon earn- 
ings. The income of the corporation in turn is dependent 
not only upon the earning power of the tangible and in- 
tangible assets that it employs in its business, but also upon 
the efficiency of its managers and the financial policies of 
the entrepreneurs. To insufficient assets coupled with too 
much optimism regarding future earning power, may 
be attributed most cases of over-capitalization that have 
been so conspicuous in the corporation annals of this 
country. 

In the following table are shown some of the more 

prominent examples of over- capitalization.^ 

9 The data relating to the United States Steel Corporation is 
taken from Ripley, Trusts, Pools and Corporations and, for the other 
four corporations, from Dewing, Corporate Promotions and Re- 
organizations. 



^ 



THE CORPORATION — SECURITIES, ETC. 149 



Kinds of securi- 
ties making up 
the capitaliza- 
tion 



Bonds 

Preferred stock, . . 

1st 

Preferred stock, . . 

2d, 

Common stock . . . 
Capitalization. . . . 
Estimated assets. 



National 

Starch 

Co. 



$3,837,000 

2,219,400 

1,846,800 
4,450,700 
12,353,900 
-3,750,000 



Glucose 

Sugar 

Ref. Co. 



$13,639,300 



24,027,300 

37,666,600 

3,750,000 



United 
States 
Realty and 
Construc- 
tion Co. 



^27,500,000 



33,500,000 
61,000,000 
22,000,000 



United 

States 

Shipbldg. 

Co. 



$24,500,000 
20,000,000 



25,000,000 
69,500,000 
16,000,000 



United States 
Steel Corp. 



$384,413,680 
510,205,743 



508,227,394 

1,402,846,817 

793,000,000 



If the earnings are sufficient to pay the claims of all 
security holders except the common stockholders, it would 
not be a bad case of over-capitalization; and the common 
stock would have a value based on possible dividends. 
But if the earnings suffice to pay only interest on the bonds 
and part of the preferred stock dividend, allowing the un- 
paid portion to accumulate, the case is much more serious. 
This will eventually necessitate a reorganization of the 
corporation in such a way as to reduce the amount of out- 
standing securities. When the corporation cannot pay the 
interest or principal on its bonds when due the result 
is insolvency and receivership necessitating a forced re- 
organization or a complete winding up of the business. 
In all of the examples given above with the exception of 
the United States Steel Corporation, over-capitalization 
resulted eventually in voluntary or forced reorganization. 
The United States Steel Corporation adopted the policy of 
putting its earnings back into plant and equipment and in 
this way built up its assets until they today exceed in 
value the sum of its outstanding securities. 

A further study of the corporate securities, their uses, 
advantages and disadvantages, as well as their relation 
to capitalization and the financial policies of corporations, 
cannot be undertaken in this work. These aspects of 
corporate organization are specifically treated in standard 
works on corporation finance. 



CHAPTER IX 

THE CORPORATION — FORMATION, CHARTER 
AND BY-LAWS 

The lack of uniformity in the corporation laws of the 
several states of this country, together with the annoying 
frequency with which these laws are modified, or repealed 
and redrafted by the state legislature, makes it next to 
impossible to lay down any general rules of procedure that 
must be followed in forming a corporation. There are al- 
most as many variations as there are states, and each year 
sees new requirements introduced and old discarded ones 
resurrected. If the student is especially interested in the 
prescribed procedure of any particular state, he must con- 
sult its latest revised statutes. The only practical presenta- 
tion of this subject for the student of general business 
organization must be in the nature of a general composite of 
the legal requirements as found in statutes of the states, 
supplemented here and there with notations calling atten- 
tion to more or less marked deviations from these general 
principles. 

General and Special Corporation Laws. — In the pre- 
ceding chapter it was pointed out that the early corpora- 
tions were created by special act of the state legislature. 
This method of formation was finally abandoned when the 
state of Rhode Island, in 1892, amended its constitution, 
providing for incorporation under general corporation 
laws. Today such general corporation laws have been 
adopted by every state. Some of these laws lay down 
uniform, general rules governing the formation of all types 
of corporations, with the exception of municipal corpora- 

150 



THE CORPORATION — FORMATION, ETC. 151 

tions; others apply to business corporations generally, 
while still others to only certain types of business corpora- 
tions. The present-day tendency is to confine the appli- 
cability of general corporation laws to all business corpora- 
tions that are not engaged in rendering a public service, 
banking, insurance and the like. This narrowing of the 
scope of such general laws appears to follow a line whose 
determination rests upon the existence in the enterprise of 
a special public interest that can be adequately safeguarded 
only by closer regulation and control afforded by special 
laws. Thus, we find in most states public service commis- 
sions, state bank and insurance commissioners, etc., who 
are vested with special regulatory power, as well as with 
the duty of supervising the formation and operation of 
corporations engaged in special fields of enterprise.^ 

This scheme of general and special corporation laws is 
well illustrated by the ''Business Corporation Law" adopted 
by the state of New Hampshire, in 1919. Under this law 
may be formed any corporation for the purpose of carry- 
ing on any lawful business except banking, the construction 
and maintenance of railroads, insurance, the business of 
making contracts for the payment of money at a fixed 
date or upon the happening upon some contingency, or the 
business of a trust company, surety or indemnity company, 
a safe deposit company, or a trading stamp company, or 
the business of issuing, selling or redeeming trading stamps, 
coupons, tickets or other similar devices. 

Formation of Business Corporations 

The work of forming a business corporation begins with 

the decision on the part of the persons interested to form 

1 In New York, Alabama, and -several other states the term 
"corporation" is construed to include all joint stock companies, and 
associations having any of the powers or privileges of corporations 
not possessed by individuals or partners. This would include legal 
entity, limited liability and the power to issue securities. 



152 SECURITIES-ISSUING ORGANIZATIONS 

a corporation to operate a business undertaking, and ends 
when the corporation is in a position to begin business. 
It, therefore, includes such items as (1) who may in- 
corporate, (2) pre-incorporation agreement, (3) applica- 
tion for charter, (4) certification and recording of articles 
of incorporation and (5) the organization meetings of 
stockholders and directors. The more common method 
of procedure is that here outlined, but in a few states, 
among them Maine, Massachusetts, Missouri and New 
Hampshire, the order is practically reversed. 

Who May Incorporate. — The business corporation 
must, as a general rule, be formed by natural persons of 
lawful age and legally competent. The qualifications of 
incorporators, other than this, vary greatly from state to 
state. Requirements such as the following are common: 
that at least two-thirds of the incorporators shall be citi- 
zens of the United States, and that at least one must be a 
resident of the state of incorporation. This is the New 
York provision. The number of incorporators is also 
limited by law, usually to a minimum of three, but the 
maximum number varies greatly. In practice, chiefly as 
a matter of convenience, the minimum number of incor- 
porators is most frequently used. 

Pre-Incorporation Agreement. — Naturally, those who 
desire to form a corporation must agree among themselves 
to incorporate for a particular purpose. Such an agreement 
is in the nature of a partnership agreement and incorpora- 
tors are treated as partners until the process of formation is 
complete. 

Application for a Charter. — The incorporators then 
meet to draw up the charter application. This should con- 
form in every respect to the requirements of the state laws. 
A complete application must include (1) a draft of the 
powers, and, privileges that the incorporators desire to have 
granted by the state to the proposed corporation, (2) the 



THE CORPORATION — FORMATION, ETC. 153 

tender in payment of all organization taxes and fees, 
and (3) such other documents as may be required under 
the laws of the state. 

The draft of powers, privileges, etc., should be very 
carefully prepared, as this, when granted, becomes the 
charter, or articles of incorporation. Requirements as to 
the contents of this document are in most states very ex- 
plicit. It must commonly se':< forth: the name of the 
corporation; the purpose for which it is formed; the place 
where its principal business is to be transacted; the term 
for which it is to exist ; the number of directors ; the amount 
of capital stock and the number of shares into which it is 
divided; the amount of capital stock actually subscribed 
and by whom, and such special provisions, consistent with 
the laws of the state, as the incorporators may desire to 
include. 

The other documents frequently required are such as 
relate to the consideration that the prospective corporation 
is to receive from the original subscribers in payment for its 
stock. Thus, where real estate has been pledged as con- 
sideration for stock, it must be clearly identified by metes 
and bounds and the value at which it is accepted by the 
corporation stated. 

Where there is a requirement that a certain per cent of 
the capital stock must be subscribed to and actually paid 
in, a trustee, to whom such payments are made, is appointed 
to serve until the corporation has been fully organized. 
He then turns over the consideration he has received to it. 
In Kansas, twenty per cent of the capital stock must be 
subscribed to and paid in ; in Missouri, fifty per cent. The 
same provision is also found in other states. 

All documents are then taken before some state or county 
officer where they are subscribed to by the incorporators 
and acknowledged and signed. Such officers must fre- 
quently qualify as authorized to take and certify ac- 
knowledgments of real property, such as deeds. 



154 SECURITIES-ISSUING ORGANIZATIONS 

The application, having been properly prepared and 
acknowledged, is then filed with the clerk, or recorder, of 
the county in which the corporation was formed, or with 
the Secretary of State of the state of incorporation, and in 
some states with the Attorney-General. 

The organization taxes and fees that must be paid are 
the following: 

(1) A charter tax — usually based on the amount of 
capital stock authorized. 

(2) Fees to the Secretary of State for filing and recording. 

(3) Fees to the county clerk or recorder of deeds, for 
filing and recording. 

The fees are uniformly small, but the charter taxes show 
great variations from insignificant sums to amounts that 
are very large, as the following table will show. 

Corporation Franchise Taxes of Selected States, 1919 



State of 



Alabama 

Colorado 

Idaho 

Kansas 

Missouri 

New Jersey .... 
New Hampshire 

New York 

Oregon 

West Virginia. . 



$250,000 



On authorized capital stock of 



$1,000,000 $10,000,000 



$250 


S1,000 


$10,000 


60 


210 


2,010 


60 


100 


150 


175 


550 


5,050 


150 


525 


5,025 


50 


200 


2,000 


100 


250 


1,150 


250 


1,000 


. 10,000 


45 


75 


750 


190 


340 


475 



Certification and Recording of the Charter. — The state 
or county officer to whom the documents are submitted 
causes them to be carefully examined to assure himself 
that they conform in every respect to the requirements of 



THE CORPORATION — FORMATION, ETC. 155 

law. The charter is then certified and preserved in the 
files or books of the office. Three certified copies are com- 
monly made and distributed as follows: one to the incor- 
porators for the corporation, one to the clerk or recorder 
of the county in which the main office of the corporation is 
located and one retained by the Secretary of State. Those 
copies that are kept on file in the offices of the public offi- 
cials are open to inspection by the public, so that whoever 
deals with the corporation may know what its powers and 
privileges are. 

Organization Meetings. — Notice of certification of the 
charter having been received by the incorporators, these 
must now proceed to effect a functioning organization. 
This may be done at the first meeting of stockholders and 
of the board of directors. 

The first meeting of stockholders is usually assembled 
by bringing the incorporators together by means of a 
written call and waiver of notice, signed by all of the in- 
corporators. The call should indicate the purpose and 
place of the meeting. The meeting is then called to order 
and organized by the election or appointment of a chair- 
man and a secretary. The adoption of the charter and the 
framing and adoption of by-laws follow. This done, the 
stockholders proceed to elect the first board of directors, if 
these are not already named in the charter. In a number of 
the states, as in New York, the laws require that the 
directors for the first year must be named in the charter, 
which does away with the necessity of electing them at the 
first meeting of the stockholders. The next thing in order 
is the conclusion of the exchange of the corporate stock for 
property tendered the corporation for it. Such transactions, 
which amount to an acceptance of subscriptions to stock, 
must have express authorization of the stockholders, even as 
to price. 

The first meeting of the board of directors ordinarily 



156 SECURITIES-ISSUING ORGANIZATIONS 

follows the first meeting of stockholders. At this meet- 
ing the directors first read the by-laws to familiarize them- 
selves with their contents, particularly as to rules laid 
down for their own control and as to officers to be elected, 
their duties, etc. They then elect the officers of the cor- 
poration; adopt, or make provision for the adoption of a 
stock certificate ; accept the subscriptions to stock by others 
than the original incorporators; formally exchange stock 
for property as instructed by the stockholders, fix the 
treasurer's bond, designate a bank as depositary of funds, 
and attend to such other matters as may be brought be- 
fore them. 

The corporation is then ready to undertake business. 

Reversed Procedure. — The " Business Corporation 
Laws " of New Hampshire (1919) furnish an excellent ex- 
ample of a prescribed procedure that is practically the 
reverse of the more frequently encountered form described 
above. The following brief description of this plan is 
taken from the Corporation Journal.^ " Three or more 
persons may associate together to form a corporation. Any 
two of the first three persons signing the articles of agree- 
ment may call the first meeting of incorporators. At the 
organization meeting the incorporators effect an organiza- 
tion by the adoption of by-laws and by the election of a 
temporary clerk, a treasurer, a board of not less than three 
directors and such other officers as the by-laws may 
prescribe. The incorporators determine the amount of 
capital stock then to be issued and the consideration. The 
treasurer and the majority of the directors thereupon sign 
and make oath to the record of organization, which shall 
contain a true copy of the articles of agreement, the date 
of the organization meeting, the names and addresses of the 
officers and directors and the original or true copies of all 
votes passed authorizing the issuance of stock. The record 

2 The Corporation Journal, No. 89, Vol. Ill, pp. 362, 363. 



THE CORPORATION — FORMATION, ETC. 157 

of organization shall be submitted to the Attorney-General 
and, if it is in conformity to law, he shall so certify and 
endorse his approval thereon. The organization record 
shall, upon payment of the organization tax, be filed in 
the office of the Secretary of State, who thereupon issues 
a certificate of incorporation. The existence of every cor- 
poration begins upon the filing of the organization record 
in the office of the Secretary of State." 

** Cut and Dried'* Procedure. — While the procedure 
above outlined is in principle that required of law, in prac- 
tice much of the work of actually forming the modern 
corporation is turned over to a law firm or some corpora- 
tion that specializes in that service. In this way the whole 
procedure may be handled in a ^' cut and dried " way, re- 
lieving the incorporators of much tedious detail and 
routine. A tentative charter with " dummy " incorpora- 
tors, — namely men who are employees of the law firm or 
organization company retained to organize the corpora- 
tion, — may be employed. Thus, a complete " dummy " 
corporation may be set up and organized; whereupon, the 
charter is amended by substituting the real charter for the 
tentative one, and the " dummy " incorporators, officers, 
etc., are disposed of by transferring the stock to which they 
have subscribed to the real incorporators. This is the pro- 
cedure that has been followed by many of our larger cor- 
porations, notably the United States Steel Corporation. 
A careful study of the charter of this corporation given in 
Part VI of the text will make this method of incorporation 
clear. 

The Charter 

No uniform practice of nomenclature relative to this 
document is to be found in the state incorporation laws. 
In some of them it is designated as the certificate oj incor- 
poration, in others as the articles of association or articles 
of incorporation and in still others as the charter. 



158 SECURITIES-ISSUING ORGANIZATIONS 

The charter is to the corporation what the constitution 
is to the state, namely, a fundamental limitation upon its 
powers. Since the corporation may do only those things 
that it is specifically authorized to do, it is needless to 
point out the importance of the exercise of great care in 
framing its clauses. In drawing up a charter, it is not a 
question of obtaining from the state all the powers and 
privileges that may seem desirable, but rather the maxi- 
mum that may be obtained within such restrictions as are 
imposed by the state constitution and the general or special 
incorporation laws. Powers in excess of such legal limi- 
tations, even though granted in the charter, are held by the 
courts to be non-operative. Again, powers, not granted in 
the charter, when exercised by the corporation, are held to 
be acts ultra vires, and are non-enforceable. These two 
considerations are the guides that the incorporators must 
follow in framing their charter. 

The present-day policy of the courts in interpreting the 
charter powers of corporations, appears to have become 
much more inclined toward liberalism than in former years. 
The attitude taken is, that by granting a charter the state 
intended to create an artificial person capable of perform- 
ing the purpose for which it was organized ; and any slight 
deficiency in the charter which, if interpreted strictly, 
would prevent the proper functioning of the corporation, is 
now commonly held not to debar it. Nevertheless, it is 
always better to provide for all of the powers necessary in 
the charter. 

Main Features and Provisions. — Most incorporation 

laws prescribe in general terms what the charter must set 

forth. Its contents, however, are by no means restricted to 

such requirements. In practically all cases the charter 

must contain brief statements on the points discussed 

below.^ 

3 The specimen charters given in Part VI should be carefully 
studied section by section in connection with discussion in the text. 



THE CORPORATION — FORMATION, ETC. 159 

1. Name of the Corporation. — Every corporation has a 
proprietary interest in its name just as it might have in 
a trade-mark or a grant of patent. Within the granting 
jurisdiction this name may not be assumed by any other 
corporation. This rule, however, has its exceptions. In 
Rhode Island and South Carolina a foreign corporation 
of the same name as a domestic corporation may be per- 
mitted to enter the state and to do business there. In the 
former state a domestic corporation may also, with the 
consent of an old corporation that is to be dissolved, assume 
the name of the latter. But these practices are, by no 
means, of general occurrence. In nearly all states the 
name must end with some word such as ^' company," '' as- 
sociation," '' corporation," or " hmited." The purpose of 
this requirement is to protect those who do business with 
the corporation so that they may know the nature of the 
organization with which they are. dealing. 

2. Location of the Main Office. — In most of the states 
the laws require that the corporation shall establish and 
maintain its main office in the state that has granted the 
charter. At this office must be kept certain books and 
records. In many of the states, the meetings of stock- 
holders and board of directors must be held there, and 
there must also be found in this office an agent, through 
whom any legal process or action against the corporation 
may be brought. Where required, the name of such resi- 
dent agent is given in this section of the charter. 

3. Object and Purpose. — The section of the charter de- 
fining the object and purpose of the corporation is of ex- 
treme importance. This cannot be changed at will as 
expedience may seem to dictate, and if it does not embrace 
all things contemplated, it may become a stumblingblock 
in the way of business expansion. The present-day tend- 
ency with respect to objects of the corporation is to make 
them as comprehensive as permissible, and in this way to 



160 SECURITIES-ISSUING ORGANIZATIONS 

approach as nearly as possible the wide sphere of activity 
in business enjoyed by natural persons. A common prac- 
tice is to divide this clause into three parts; the first 
describing in specific and general terms the nature of the 
business to be undertaken, the second, to give the cor- 
poration power to own and enjoy possession of real 
property, and the third to give it as nearly as possible the 
powers of a natural person. This is well illustrated by the 
following object clause for a mining and manufacturing 
corporation:* 

1. To engage in mining of all kinds; manufacturing of all 

kinds; building of houses, structures, vessels, ships, boats, 
railroads, engines, cars or other equipment, wharves or 
docks, and to own and operate the same. 

2. To lease, buy, sell, use and hold all property, real or per- 

sonal, as may be necessary or convenient in connection 
with the said business. 

3. To do any or all things set forth in this certificate as objects, 

purposes, powers or otherwise, to the same extent and 
as fully as natural persons might do and in any part of 
the world. 

4. Capital Stock. — This clause gives the total amount 
of the capital stock that the corporation is authorized to 
issue, the classes into which it is divided and the rights 
that the holders of each class enjoy. When only par 
value stock is to be issued, the amount of the capital stock 
will be given as a stated sum, say, $1,000,000. divided into 
10,000 shares of the par value of $100. per share. Then, if 
two classes, such as common and preferred stock, are to be 
used, the number of shares and the amount of each class 
is stated, together with a clear description of the rights of 
holders. When stock without par value is used, the number 
of such shares and the amount of the paid-in capital with 

* See also the special object clauses given in Part VI. 



THE CORPORATION — FORMATION, ETC. 161 

which the corporation is to commence business must be 
given. It is also possible to provide for both par value and 
non-par value stock, as well as for several classes of each 
kind. The classification of common stock, as for example 
into voting and non-voting, is not allowable in all of the 
states, but may be provided for in the by-laws by unani- 
mous consent of the stockholders. Such classifications are 
frequently employed in reorganizing a partnership. On 
the whole, the charter provisions relative to capital stock 
are simple, and it may be added that simplicity is desira- 
ble. Where many classes of stock are issued the tend- 
ency is toward the development of group interests among 
the stockholders which may reflect unfavorably upon any 
concerted action on the part of all interested in the business. 

5. Incorporators. — In all of the states it is required that 
the charter give the names and places of residence of each 
of the original subscribers to the capital stock, and the 
number of shares subscribed for by each. Where one of the 
conditions prerequisite to the granting of the charter is 
that a certain per cent of the capital stock shall be sub- 
scribed to and paid in, this section is important. 

6. Duration. — This section simply states the period for 
which the charter is granted, either for a period of years 
or in perpetuity. 

7. Liability. — Although not required, a statement of the 
liability that the stockholders assume is frequently in- 
serted, especially in charters granted by states that impose 
double liability. 

8. Directors. — There is always a section of the charter 
devoted to the directors. In its briefest form, this simply 
sets forth the number of directors and their qualifications. 
These qualifications vary greatly, but it is quite common 
to require that at 'least one director shall be a resident of 
the state of incorporation, and that a person to be eligible 
to hold the position of director must be the holder of at 
least one share of stock. 



162 SECURITIES-ISSUING ORGANIZATIONS 

As the authority of the board of directors under the com- 
mon law extends to all subjects connected with the manage- 
ment of the corporate affairs, any restrictions upon this 
wide power should be provided for by inserting them either 
in the charter or in the by-laws. The more important ones 
are commonly found in the charter, for example, provi- 
sions limiting the power of directors to sell or mortgage 
the property of the corporation, to incur indebtedness, to 
pass by-laws, etc. 

Classification of directors so that their terms of office do 
not all expire at the same time is desirable and is usually 
provided for in the charter. Its aim is to secure a stability 
of management. 

If the board of directors is large, it may be found ad- 
visable to provide for standing committees composed of 
members of the board. They may be provided for in the 
charter or in the by-laws. Two such committees are 
usually found, an executive committee and a finance com- 
mittee, the former exercising general powers of direction 
and the latter acting on matters pertaining to finance. 

9. Special Provisions. — The general corporation laws 
of the states up to 1896 were not very liberal in the powers 
granted under them. They sought, as it were, to cast 
all corporations in the same mold, which of itself was 
sufficient to prevent broad freedom of action and flexibility 
in structure of the corporate organization. The first 
marked change in this policy came with the passage of 
the New Jersey act of that year. To this act was added, 
two years later, the following clause: " The certificate of in- 
corporation may also contain any provision which the in- 
corporators may choose to insert, for the regulation of 
the business and for the conduct of the affairs of the cor- 
poration, and any provision creating, defining, limiting and 
regulating the powers of the corporation, the directors and 
the stockholders, or any class or classes of stockholders; 



THE CORPORATION — FORMATION, ETC. 163 

provided such provision be not inconsistent with this act." 
Other states soon followed suit, notably, Delaware, Maine, 
West Virginia and to a less extent New York.^ 

Such provisions as the above, and others, make it possi- 
ble to insert clauses into the charter vesting the corpora- 
tion with special powers and providing for special features 
which otherwise would have to be taken care of as well 
as possible in the by-laws. 

Among the objects that are usual subjects for special 
provision clauses are the classification of directors, the 
limitation of directors' power to incur debts or to sell 
the assets of the corporation, cumulative or other methods 
of voting, limitations on salaries of officers, sub-classifi- 
cation of stock, and power to own the stock and securities 
of other corporations. 

By-Laws 

The underlying statutes and the charter of the corpora- 
tion are usually supplemented by an additional set of 
rules and regulations called by-laws. These not only de- 
termine to a considerable extent the details of the form of 
organization that the corporation is to employ, but also 
serve at the same time as a guide setting forth the rules 
of procedure that are to govern the stockholders, directors 
and officers in carrying out the various functions of the 
corporation. In a small corporation whose stockholders 
are few in number and for the most part serve on the board 
of directors, there is little need of a set of by-laws; but in 
the case of a large corporation whose stockholders may 
run into the thousands, and whose board of directors may 
consist of well over a score of members, a set of by-laws 
drawn up with great care and foresight, even with respect 
to fine points of detail, is almost indispensable. Practically 

5 T. Conyngton, Corporate Organization and Management, pp. 
172, 173. 



164 SECURITIES-ISSUING ORGANIZATIONS 

all of the larger corporations have very complete by-laws. 

Purpose and Adoption. — The by-laws, in most cases, 
emanate from the stockholders. It is only by laying down 
a more or less rigid set of rules and regulations governing 
the qualifications and functions of the directors and officers 
that the stockholders may retain a semblance of control 
over the functioning of the impersonal organization that 
they have interposed between themselves and their business 
property. Here, then, we find the chief purpose of the by- 
laws, namely, to protect the stockholders of the corpora- 
tion as far as possible against the unlawful or unauthorized 
acts of its directors, officers and agents. 

In the great majority of the states the power to adopt 
by-laws is reserved to the stockholders, who may ordinarily 
adopt or amend them . t any regular meeting in ac- 
cordance with the statutes, the charter and such rules as 
may have been previously adopted. A few exceptions to 
this general rule can, however, be noted: in Illinois the 
statutes give the directors the power to make and amend 
by-laws to the exclusion of the stockholders;^ under cor- 
poration laws modeled after the laws of New Jersey the 
charter may be so worded as to give the directors power 
to adopt by-laws, and in New York the statutes give the 
directors power to adopt by-laws not inconsistent with 
those passed by the stockholders. Taken by-and-large 
these exceptions seem to be diametrically opposed to the 
theory of impersonal organization for business purposes. 
This leaves the advisability of such a practice open to 
serious doubt; the more so, in view of the extremely lax 
qualifications for directors. 

The by-laws, when used, are usually prepared in ad- 
vance of the first meeting of stockholders by the incorpora- 
tors or their attorney, and are read and adopted by a 
majority (or a two-thirds) vote of the outstanding stock. 

6 Conyngton, Corporate Organization and Management, p. 192. 



THE CORPORATION — FORMATION, ETC. 165 

Once adopted they may be amended at any regular meeting. 
Contents. — The content of corporate by-laws, in so far 
as the general subject matter is concerned, has become 
fairly well stereotyped and standardized. Complete sets, 
ready for use, can be furnished at a moment's notice by any 
reputable attorney who specializes in corporate organiza- 
tion. The topics ordinarily treated may be classified as 
follows : 

1. Stockholders 

2. Directors 

3. Standing Committees (if any) 

4. Officers 

5. Stock 

6. Dividends and Finance 

7. Sundry Provisions 

8. Amendments 

Under each of the above titles are usually included in 
brief and succinct form the more salient provisions of the 
statutes of the state of incorporation, the provisions of 
the charter and such other additional regulations pertinent 
to the subject as may be deemed necessary. 

The discussion and explanation of the several subjects 
treated in the by-laws, and enimierated above, are so 
closely connected with a description of the functioning of 
the corporation that it is thought best to leave them for 
the next chapter.^ 

'^ A full reprint of the By-Laws of the United States Steel Cor- 
poration is given in Part VI, Form 31. 



CHAPTER X 
THE CORPORATION — ITS OPERATING MECHANISM 

The principle underlying the operating mechanism of 
the corporation is characteristic of the securities-issuing 
organization. It consists of the separation of the three 
functions of ownership, dir-^ction and management, and 
their delegation to three legally distinct bodies respec- 
tively, the stockholders, the board of directors and the 
officers.^ The duties, obligations, right and privileges of 
each body are generally clearly defined by statutory law 
and by sections in the charter or by-laws of the corpora- 
tion. 

The corporation cannot well dispense with any one of 
these three bodies. Though at times their personnel is 
identical, as in the case of a small close corporation whose 
stockholders are so few that all are at the same time on 
the board of directors and serve also as officers. In such 
cases, confusion frequently results through laxness in ob- 
serving the provisions of the law or of the charter dele- 
gating to each body its distinct duties and powers. Thus 
the persons interested in the corporation often fail to 
keep proper records, or do not distinguish clearly whether 
action was taken by the stockholders, by the directors or 
by the officers. Such actions as these are irregular and 
might lead the corporation into difficulties. Large corpora- 

1 This is the American practice. In England, the checking up on 
operation is done by independent auditors ; while in Germany, a su- 
pervising board is prescribed in addition to the board of directors, 
stockholders and officers, and independent auditing also is provided 
for. 

166 



THE CORPORATION — OPERATION 167 

tions take great care to follow the letter of the law in all 
these matters, and invariably employ an attorney to give 
them the necessary legal advice. 

The Stockholders 

The body of stockholders of the corporation constitutes 
the entrepreneurial element in the organization. It consists 
of all persons, natural and artificial, who are the rightful 
owners of at least one share of the corporation's stock. 
There is no restriction as to who may become a stock- 
holder, except in those states that prohibit one corporation 
from holding the stock of another.^ The ease of trans- 
ferring shares, coupled with the relatively wide range of 
potential stockholders, results in a continual change in the 
personnel of the body of stockholders, particularly in the 
case of the larger corporations. This condition is well 
illustrated by reference to the table showing the percent- 
age of turnover of stock of some large American corpora- 
tions. Each sale of stock effects a change in the personnel 
of the body of stockholders. The reports of the United 
States Steel Corporation, giving the number of common 
stockholders receiving dividends each quarter year, are 
also illustrative of this point. 

The following table shows the number of common stock- 
holders of the United States Steel Corporation for each 
quarter from 1915 to 1920: 

Year 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter 



1920 




90,952 


87,229 


83,583 


1919 


73,318 


73,456 


74,071 


78,018 


1918 


72,779 


65,862 


63,507 


61,044 


1917 


51,689 


44,789 


43,482 


42,564 


1916 


37,720 


40,430 


41,156 


41,910 



1915 45,767 51,169 55,907 56,825 

2 This was, with certain exceptions, the law in New Jersey from 
1913 to 1920. 



168 SECURITIES-ISSUING ORGANIZATIONS 

The fluctuation is very largely the result of market con- 
ditions. It tends to increase as the dividends and quotations 
of market prices rise, and vice-versa. In small corpora- 
tions, where the stock is generally closely held, these fluc- 
tuations are not common, unless the enterprise is of a 
highly speculative character, as in oil and mining develop- 
ment undertakings. A glance at the accompanying chart 
shows us how widely the stockholders of large corporations 
are distributed over the country. 

Distribution of Stockholders of Swift & Company: 




(Courtesy of Swift & Company) 

x\s entrepreneurs of the business, the stockholders 
naturally assume the major portion of the risk of loss; and, 
in consequence, they enjoy also the right to any profits that 
the business may produce. Theoretically, they exercise the 
same function in connection with the operation of the cor- 
poration as do the enfranchised citizens in the operation of 
the state or municipality. But they are no more the corpo- 
ration itself than are the citizens the state. They are the 
final arbiters of its destiny, the beneficiaries of its successes 
and the victims of its failure. 

Powers of Stockholders as a Body. — The rights of the 



THE CORPORATION — OPERATION 169 

individual stockholder should be carefully distinguished 
from the powers of the stockholders as a body. The rights 
referred to have already been discussed in a preceding 
chapter. The stockholders can act as a body only when 
properly brought together in regular and special meetings. 
Their powers on behalf of the corporation, when they are 
thus assembled, are, in most states, clearly defined by 
statutes and are usually also restated in the by-laws of the 
corporation. Among these powers, those that stand out 
most prominently are the following : 

1. To adopt a seal 

2. To elect directors and to remove them for cause 

3. To adopt and to amend by-laws 

4. To authorize the issuance of stock 

5. To amend the charter (effective only when sanctioned by 

the state) 

6. To dissolve the corporation (also requires state sanction) 

7. To sell or mortgage the entire assets of the corporation 

Classification and Qualification. — Whenever a corpora- 
tion issues more than one class of stock, its stockholders 
are thereby divided into as many classes as there are 
kinds of stock. The special rights, privileges and powers 
that the holder of any class of stock enjoys, are clearly 
defined in the stock certificate or in the charter or by-laws. 
This is necessary because of the general rule that holders 
of preferred stock are held to have all the same rights, 
privileges and powers as common stockholders with such 
additions and limitations as are specifically granted in the 
creating clause of the charter or by-laws. This rule holds 
whether they are considered as individuals or as a body. 
In large corporations it is quite generally the custom to 
provide for at least two, and frequently three or more, 
classes of stock and hence for as many classes of stock- 
holders. Thi« practice has at times been ill-advisedly 



170 SECURITIES-ISSUING ORGANIZATIONS 

adopted with serious consequences to the corporation and 
especially to the common stockholders, as in the case of the 
United States Leather Company.^ What advantage stock 
classification may offer in matters of finance is frequently 
discounted by the fact that it tends to make the interests of 
the various classes of stockholders opposed to one another, 
and thus destroys the solidarity of the body. 

Stockholders of Record. — While it is, broadly speaking, 
correct to say that anyone who owns a share of stock in 
a corporation is a stockholder in it, it is, nevertheless, in- 
correct to assume that he thereby becomes privileged to 
participate in the deliberations of the body of stockholders. 
Something more than mere ownership of stock is required 
for this. He must be not only a stockholder, but also a 
stockholder of record; this means that his name, to- 
gether with the amount of stock and the numbers of the 
certificates that he holds, must appear on the official stock 
ledger and transfer books of the corporation. These books 
are in the hands of the secretary, who is required to note 
therein all issues and transfers of stock, so that he may 
know who is entitled to participate in stockholders' meet- 
ings and dividends; and it is to the stockholders of record 
only that the secretary sends out notices of meetings and 
the declaration of dividends. These books are usually 
closed a fixed number of days before the stockholders*, 
annual meeting is to take place or dividends are to be 
declared, in order that no question may arise as to who is, 
entitled to participate. The date of closing the books is 
fixed by the by-laws. 

Transfer Agent and Registrar. — The work of maintain-, 
ing an accurate record of all transfers of stock, especially 
in large corporations, may become quite onerous. In such 
cases, a transfer agent and a registrar are found to be 

3 See Dewing, Corporate Promotions and Reorganizations, 
pp. 16-49. 



THE CORPORATION — OPERATION 171 

almost indispensable — the transfer agent to keep a record 
of transfers and the registrar to certify to the correctness of 
the roll. The authority to employ these agents is given in 
the by-laws, which frequently even designate some trust 
company to perform both services. In this way a certi- 
fied list of stockholders can always be secured when 
desired. 

Stockholders' Meetings. — The body of stockholders has 
one regular meeting yearly, called the annual meeting; and 
in addition thereto such other special meetings as may be 
found necessary. The annual meeting is ordinarily the 
most important function for the stockholders. It is at this 
meeting that they elect directors for the ensuing year, 
amend or adopt new by-laws and consider and act upon 
any matters whatever, concerning the corporation, that 
come within their scope of action and are properly brought 
before them. The date for holding the meeting is fixed by 
the by-laws, and is, therefore, generally known to the stock- 
holders. But to make sure that all stockholders of record 
are notified the by-laws usually provide that the secretary 
shall, upon a definite date before the meeting is to take 
place, close the books and send out a general call and 
notice* to all stockholders of record. The rules of pro- 
cedure that are to govern the meeting are usually inserted 
in the by-laws, but need not be rigidly adhered to. They 
commonly prescribe who shall be the presiding officers, in 
what order business shall be conducted, what shall consti- 
tute a quorum and what method of voting shall be used. 

Officers. — Usually the president and the secretary of 
the corporation act as presiding officer and recording secre- 
tary of all stockholders' meetings, though this practice is 
not universal. Infrequently the body of stockholders 
chooses its own officers at each meeting. 

Quorum. — In many of the states the proportion of the 

4 See Forms 



172 SECURITIES-ISSUING ORGANIZATIONS 

outstanding stock that must be represented at a stock- 
holders' meeting to constitute a quorum, is fixed by law. 
^Where this is not done, the common law rule holds that 
those present, regardless of the amount of stock they repre- 
sent, constitute a quorum to transact business or elect direc- 
tors. The question, however, generally is considered to be of 
sufficient importance to merit a by-law provision, in which 
the quorum for the transaction of business is commonly 
fixed at a majority of the outstanding stock, while for the 
election of directors those present, regardless of numbers 
or the amount of stock represented, are held to be sufficient. 
This arrangement is in widespread use among corpora- 
tions chartered under the laws of the state of New York. 
Such matters as the amendment of the charter, the sale 
of the entire assets and the dissolution of the corporation 
under many state laws require at least a two-thirds 
majority of all outstanding stock. They thus require a 
quorum equally large. 

Method of Voting. — Several different methods of voting 
at stockholders' meetings are in use. Among these, the 
ones most commonly found in this country are the straight 
ballot and the cumulative method. In addition to these 
two plans, there is in use in England a third which is best 
described as a regressive plan. 

The straight ballot plan provides for the casting by the 
stockholder of one vote for each share of stock in his pos- 
session upon each motion placed before the body of stock- 
holders at any meeting. In electing directors each vacancy 
is filled separately. A bare majority under this plan is 
sufficient to elect a director, to amend the by-laws or to 
carry a motion relating to the transaction of ordinary busi- 
ness. Thus anyone who can seciu"e control over more than 
fifty per cent of the outstanding stock, is in a position to 
impose his will upon the minority stockholders in these 
matters. For the election of directors, where the stock 



THE CORPORATION — OPERATION 173 

represented constitutes a quorum, twenty to thirty per cent, 
and even less, is frequently sufficient to elect. But the 
majority can usually retain control and easily regain it if 
it happens to be lost. This system may, thus, exclude the 
minority stockholders from any representation on the board 
of directors, and therein lies its greatest weakness. 

The cumulative plan of voting is now quite general, though 
its use is confined to the election of directors. In some 
states the statutes provide that it shall be used in such 
elections; in Colorado, it must be employed unless some 
other plan is provided for in the charter, and in nearly all 
of the states it is permissible. Under this plan the stock- 
holder is entitled to cast one vote for each share of stock 
that he holds for each director to be elected. These votes 
need not be cast separately for each place to be filled, but 
may be cast together for a single candidate. This enables 
an organized minority to concentrate its votes upon one or 
two candidates agreed upon, with a reasonable assurance 
that it can elect them, thus securing minority representa- 
tion on the board of directors. A large well organized 
minority can even wrest the control of the board from a 
poorly organized, scattered majority by properly distribut- 
ing its votes. For example: Three directors are to be 
elected. The minority stockholders, controlling 45 per cent 
of the total number of votes, agree to concentrate upon 
two candidates, A and B; while the majority, controlling 
55 per cent, try to fill all three places with C, D and E. 
The percentage of votes received by the candidates is as 
follows : 





A 


B 


C 


D 


E 


Minority 
Majority 


23 


22 


25 


14 


16 



Thus, the majority stockholders will have filled but one 
place out of the three by scattering their votes too much. 



174 SECURITIES-ISSUING ORGANIZATIONS 

Had they been content with two places, they could easily 
have secured them. 

The English regressive or differential plan is based on a 
relative diminution of voting power with a progressive in- 
crease in shares held. Thus, a person holding 50 shares, or 
less, of stock, has one vote for each, share. If he holds more 
than 50 and less than 100 shares, he has one vote for each 
of 50 shares and one vote for every 2 shares above that 
number. For all shares above 100 and under 150 in number 
he has one vote for every 3 shares, and so on. The purpose 
of this plan is to give greater power to the minority, which 
ordinarily consists of stockholders whose individual hold- 
ings are small. The complexity of the plan militates 
against its use; and though permissible, its use in this 
country is very rare. , 

Voting by Proxy. — It is the common law rule that the 
stockholder must attend meetings in person to exercise his 
voting right. In some of the states there are statutes that 
permit him to delegate this right to another person when he 
cannot, or does not himself desire to attend. Where no 
such statutes exist, a charter and by-law provision will 
usually have the same effect. The instrument by means of 
which the voting right is delegated to another is a power of 
attorney, called a proxy. The proxy must authorize a 
specified person to represent the stockholder at one or more 
meetings. It may authorize him to vote upon all, or only 
upon certain specified matters; and it may permit him to 
exercise his own judgment in voting or prescribe how the 
votes are to be cast. Under many statutes, the length of 
life of the proxy is limited by a provision requiring that it 
be executed within a certain number of months preceding 
the date of the meeting. Under the federal law a small 
tax must be paid on all proxies. It is customary to refer 
to the person to whom the voting power is delegated as 
" the proxy." Any person who is competent at law to 
act as agent may act as proxy. 



THE CORPORATION — OPERATION 175 

Stockholders^ Voting Trusts. — The principle of placing 
property in the hands of a trustee, to be managed by him 
for the benefit of the original holder, is well recognized at 
law. The stockholders of a corporation frequently avail 
themselves of the trust agreement to conserve certain 
special interests, to retain control of the corporation in the 
hands of the majority or more effectively to protect the 
interests of the minority or some class for a consecutive 
term of years. These trusts are formed by vesting the title 
to the stock in one or more trustees, who thereupon issue 
to the stockholders entering the trust, trustees' certificates 
representing the number of shares deposited. The trustees 
thus become possessed of all the rights of stockholders in- 
cluding the right to vote and to receive dividends, and their 
names appear on the stock transfer books as the right- 
ful owners of the shares of stock deposited with them. 
They must vote, dispose of dividend^ and otherwise act as 
stockholders of the corporation in strict accord with the 
terms of the trust agreement entered into between them- 
selves and the participating stockholders. While the agree- 
ment is in force, the trustees must keep the securities in- 
tact, cast the votes en-bloc and otherwise treat the trust 
property as a unit until such time as the trust agreement 
expires, or the trust is dissolved by mutual consent or as 
provided for in the agreement. Such voting trusts are also 
frequently known as " stock pools." 

Voting trusts are expressly sanctioned by the laws of the 
states of New York and Maryland, and have been de- 
clared lawful in many other states. It is the opinion of an 
eminent corporation lawyer *' that a voting trust, reason- 
able as to its duration and equitable as to its purpose, 
would be sustained in any state of the Union." ^ When the 
voting trust is employed to bring two or more corpora- 

5 Thomas Conyngton, Corporate Organization and Management, 
p. 449. 



176 SECURITIES-ISSUING ORGANIZATIONS 

tions under the close control and supervision of a small 
group of trustees, it becomes a combination trust. This 
type, as in the case of the old Standard Oil Trust, quite 
generally has been declared illegal on the ground that such 
a trust divests the stockholders and directors of the cor- 
porations of their control over them. 

Protection of Minority Stockholders. — From what has 
been said relative to the body of stockholders, it is apparent 
that the minority stockholders have little or no influence 
in determining the basic policies upon which the operation 
of the corporation must rest. This fact is at the same time 
one of the weakest and strongest features of the corporate 
form of organization. The great advantage of the majority 
rule plan lies in the decisiveness and continuity with which 
an action, once decided upon, may be carried through. The 
minority stockholder has, ordinarily, only one of two al- 
ternatives to follow: He may either accept the majority's 
decision, or sever his connection with the enterprise by 
disposing of his stock. 

After the corporation has once been formed and put 
intoi operation, there is little chance that any special 
minority interest will be safeguarded or protected. If it 
is at all desirable to protect special minority interests — 
as frequently is the case in transforming a partnership 
where the interests of the several partners vary and must 
be preserved in the corporate form — this should be done 
when the charter is prepared. At that stage of incorpora- 
tion proceedings, it is possible in several ways to conserve 
special rights and privileges of the several partners, par- 
ticularly in the matter of preserving an equal voice in the 
management in the face of unequal capital investments and 
special limitations on the capital risk. Among the special 
organization features that are most frequently employed 
for this purpose are the following: 



THE CORPORATION — OPERATION 177 

1. Special kinds of preferred stock 

2. Classification of common stock into voting and non-voting 

classes, or into blocks each of which is given power to 
elect a specified number of directors 

3. Cmnulative voting 

4. Special majorities to authorize certain acts such as the sale 

or hypothecation of the assets, etc. 

It is obvious that the majority stockholders have the 
power to control the policies of their corporation. Such an 
arrangement is unquestionably just and right. To be sure, 
they cannot exercise this power for the purpose of discrimi- 
nating against the minority, but must exercise it to foster 
what in their opinion is to the best interest of the corpora- 
tion. If they do otherwise, they may be brought before 
the courts for violation of law. Any protracted struggle 
between the majority and minority interests of a corpora- 
tion will result only in impairing its -chance of success and 
may ultimately result in its ruin. The minority stock- 
holders, in such cases, are not obliged to retain their shares. 
If they are dissatisfied with the majority policy they had 
better sell their stock rather than to launch a campaign of 
obstruction and hindrance. If, therefore, special rights 
and privileges attached to the person of the entrepreneur 
are to be preserved, this is much more satisfactorily ac- 
complished through the use of special types of personal 
ownership organization than through the corporation, 
whose highly impersonal character makes it less adaptable 
to such a purpose. 

The Board of Directors 

The Function of the Board of Directors. — It is through 
the exercise of authority and power vested in the board of 
directors that the business corporation becomes a live en- 
trepreneurial organization. Without a board of directors 



178 SECURITIES-ISSUING ORGANIZATIONS 

the business corporation cannot function. The function 
of the board, then, is to manage the corporation and to 
direct its operations within the scope of the broad lines of 
policy laid down by the stockholders. This function of 
management, coupled with custodianship of the property 
of the corporation, places the members of the board, col- 
lectively and individually, in the position of trustees of the 
corporation; and as such, they may have no interests ad- 
verse to those of their company. 

Election, Term of Office, Etc. — The members of the 
board of directors are elected by the stockholders at the 
annual meeting of the latter body. The procedure to be 
followed in such elections has already been described in 
the preceding section of this chapter and need not be re- 
stated here. 

The term of office of directors is ordinarily one year ; but 
the incumbent continues to serve and to perform the duties 
of the office until a successor is elected and qualifies. Thus, 
if for any reason the stockholders neglect to hold an annual 
meeting or pass over the election of directors, the whole 
existing board would continue to serve. In small corpora- 
tions whose stock is closely held by but a few stockholders 
it is quite common in this way to permit a board of direc- 
tors to continue in office for several years without change. 
This practically makes the board a self-perpetuating body, 
for any vacancies that occur between stockholders' meet- 
ings may be filled by the remaining members of the board. 

Classification of directors is often resorted to in order to 
minimize the probability of sudden changes in managerial 
policy. Such classifications usually provide for a three 
year term for directors, and divide the body into three 
sections so that the terms of the members of one section 
will expire each consecutive year. This practice, however, 
is confined very largely to those corporations that have a 
relatively large board. Where the board is small it would 



THE CORPORATION — OPERATION 179 

serve no purpose. For such a classification see the charter 
of the United States Steel Corporation in Part VI. 

If for any reason, the stockholders desire to remove a 
duly elected and qualified director, they have that power 
within certain limitations. Under common law rules they 
can remove him for good cause only and must give him an 
opportunity to be heard and to defend himself at the stock- 
holders' meeting. The common-law rule is modified in 
many states by statutes permitting the removal of direc- 
tors more or less at will by a majority vote of the stock- 
holders at regular or special meetings called especially for 
that purpose. The same freedom in the removal of direc- 
tors may also be secured through charter or by-law provi- 
sions; and such provisions are very frequently found. 

Number and Qualifications of Directors. — The statutes 
of most states prescribe a minimum number of directors, 
three and five being the more common. A few state laws 
establish also a maximum number, as in Colorado. In 
practice there is a wide range extending from three to thirty 
and even more. Whenever possible an odd number is 
chosen, because this will prevent a tie vote. Tie votes 
in the board of directors are not only annoying but also 
detrimental to the best interests of the corporation. A 
board that, due to its organization, cannot agree upon a 
decisive action is useless to the corporation. However, in 
corporations that have been formed from partnerships it 
is frequently desirable to have an even mmiber of direc- 
tors in order to preserve an equal share in the management 
of the reorganized business; but this is possible only in 
those states whose laws do not prescribe an odd number. 

The qualifications for the office of director of a corpora- 
tion are few. At common law any natural person who 
has attained his full legal rights may be elected to the 
board. In nearly all of the states, the statutes now modify 
this rule by requiring a director to be the owner of at least 



180 SECURITIES-ISSUING ORGANIZATIONS 

one share of the corporation's stock. This requirement is 
little more than a legal formality. Any hireling who may 
legally enter into a contract may be presented with a 
single share of stock to qualify him for a place on the 
board of directors, be elected to that place and then be re- 
quired to vote as directed or ordered by the interests that 
placed him there, and be paid for his services in the bar- 
gain. Such a director is called a dummy director. Dummy 
directors are frequently employed to round out the re- 
quired number of directors in corporations formed from 
partnerships, and also where state laws require that at 
least one director be a resident of the state of incorpora- 
tion. The stock ownership qualification is of such small 
moment that it might as well be done away with. Rhode 
Island, in its recently adopted corporation laws omitted 
it entirely. In Massachusetts, in 1919, it was modified 
so that a manufacturing corporation may, through by-law 
provision, arrange for the nomination and election by its 
employees or one or more of their number to membership 
on the board of directors.^ 

Residence within the state of incorporation for at least 
one director is also a common requirement which is easily 
complied with through the use of a dummy. The demand 
for dummies for this purpose has become so great in such 
states as Delaware and New Jersey that a corporation 
has been formed whose purpose it is to supply them to 
outside corporations incorporated under the laws of these 
states. It has happened that dummies of this type have 
had the deciding voice on the board in case of a tie vote 
of contending factions. 

In addition to these general qualifications, a number of 
the states require that at least one, and sometimes more, 
of the directors must be citizens of the United States. In 

^ New Jersey corporations were authorized to do the same thing 
in 1920. 



THE CORPORATION — OPERATION 181 

the absence of such a provision an alien may qualify under 
the common law. 

Compensation. — The directors of a corporation may re- 
ceive compensation as provided for in the statutes, the 
charter or the by-laws. Regular salaries, while not 
generally prohibited, are unconmion. The usual practice 
is to pay directors a nominal sum for each meeting; these 
sums range from five to twenty-five dollars; in most small 
corporations, however, directors serve without compen- 
sation. 

The Individual Director's Relation to the Corporation. — 
In the external relations of the corporation, the individual 
director plays no role. He has no greater power to bind 
the corporation in contracts than the individual stockholder. 
Any attempt on his part to enter into a contract on behalf 
of the corporation without special delegation of authority 
by the board of directors would be, as far as he is con-, 
cerned, an act ultra vires, or beyond his powers, which 
would make him individually liable. 

In connection with the internal relations of the corpora- 
tion the individual director possesses certain rights and 
privileges not enjoyed by the individual stockholder. How- 
ever, even these are restricted to such rights and privileges 
as are of themselves necessary to enable the director to 
familiarize himself with the corporation's affairs, so that 
he may act intelligently on its behalf. Thus, he has the 
right to inspect all of the books, records and accounts of 
the corporation as well as its property, and also to be 
notified of, and to participate in, all directors' meetings and 
meetings of standing committees. The right of the director 
to inspect books, records, etc., is much broader and more 
comprehensive than that of the stockholder, for he must 
know the condition of the physical as well as the financial 
affairs of the corporation if he is to be responsible for its 
management. 



182 SECURITIES-ISSUING ORGANIZATIONS 

It is at once seen that the individual director, as such, 
possesses no special rights and privileges that give him 
any direct power or authority to manage the affairs of 
the corporation. This must be done through the board of 
directors acting as a body. 

Powers of the Board of Directors. — As before stated, 
the function of the board of directors is to manage the cor- 
poration. To enable the board to perform this function 
properly, it is vested with wide powers. In fact, in the 
board of directors are embodied all of the powers that the 
corporation enjoys by virtue of having been created an 
artificial person; and the board exercises them to the ex- 
clusion of the body of stockholders and officers. These 
powers may be summarized as follows: 

1. To take such measures consistent with law, as the directors 

may deem advisable for the proper management of the 
corporation 

2. To delegate the exercise of managerial authority to others 

3. To adopt a stock certificate and to issue stock 

4. To declare dividends 

5. To fill vacancies on the board 

6. To exercise certain miscellaneous and special powers by 

virtue of by-law provisions. 

Power to Manage. — In the exercise of its managerial 
power, the board of directors is authorized to plan and 
build up the administrative and operating force of the 
corporation; to select the sites and location of its estab- 
lishments ; to erect, operate and maintain the physical plant 
and equipment; to enter into all contracts on behalf of the 
corporation; and to determine and carry out its financial 
policy. 

It is, of course, incumbent upon the directors to exercise 
such discretion and caution in these matters as might be 
taken by any prudent business man. They cannot wil- 
fully and knowingly waste the corporation's assets or 



THE CORPORATION ->- OPERATION 183 

employ them for their own private gain without incurring 
a personal liability toward the creditors and the stock- 
holders. But, with tha exception just noted, the limitations 
upon the free exercise of managerial powers through 
statutes are few and unimportant. If it is deemed ad- 
visable or necessary to limit it in any way, this is usually 
done through charter and by-law provisions. Among limi- 
tations of this sort are conomonly found such as require an 
extra majority of the board to incur expenditures above 
a certain specified amount; that prescribe maximum limits 
for salaries of officers, directors and agents, or that limit 
the indebtedness that the directors shall be permitted to 
incur. 

Delegation of Authority. — Under the common law the 
directors are obliged to ' attend in person to managerial 
matters; they cannot delegate this authority to others. 
This rule may be changed by statute,' charter provisions or 
by-laws. The ordinary practice now is to permit the 
directors to delegate the exercise of their managerial 
authority, either in w^hole or in part, to a select group of 
their number or to agents; though in so doing they do not 
relieve themselves of responsiblity for the acts of such 
agents. To relinquish responsibility they would have to 
resign from the board. 

The powers of the board may be delegated to a single 
director to be exercised by him within such bounds of dis- 
cretion as the board may determine. This would make him 
a managing director. Except during directors' meetings he 
becomes the supreme manager of the business, having 
control over the entire operation of the business including 
authority over the officers. The managing director is most 
commonly found in small corporations where one man is 
familiar with the details of technique and operation while 
the others are merely contributors of funds. 

In large corporations the board of directors frequently 



184 SECURITIES-ISSUING ORGANIZATIONS 

has from twenty-five to thirty or more members. They are 
usually busy men whose interests are so varied that they 
can devote little time to board meetings. Consequently it 
is at times difficult to secure a quorum. It is also quite cer- 
tain that some members of the board will be experts in 
finance while others have exceptional executive ability and 
still others may have little knowledge of the problems con- 
nected with the business. In such cases, it is found desira- 
ble to delegate authority over executive matters and finance 
to special committees made up of a small number of 
especially qualified men chosen by the board from among 
its members. In this way are constituted the executive 
committee and the finance committee of the board of direc- 
tors. These committees cannot, however, delegate any 
authority vested in them to others but are directly responsi- 
ble to the board for their actions. Any member of the 
board has full right to sit in at any of their meetings. The 
number of directors that is to compose the committees, the 
procedure in appointing them and the powers given them 
are usually carefully set forth in the by-laws of the corpora- 
tion."^ 

The ordinary duties of supervision of the operation and 
administration of the corporation, while they are by law 
vested in the board of directors, are by that body usually 
delegated to officers chosen for that purpose. The duties, 
powers and obligations of these officers will be reserved for 
discussion in the last part of this chapter. 

Power to Fill Vacancies. — Whenever any vacancy oc- 
curs on the board of directors such vacancy may be filled 
by the remaining members of the board for the unexpired 
term. A majority vote of the full board is ordinarily re- 
quired for this purpose, but through by-law provision an 
extra majority may be required with a view to protecting 
the minority interests. 

'^ This is well illustrated by the by-laws of the United States 
Steel Corporation given in Part VI. 



THE CORPORATION — OPERATION 185 

Power to Declare Dividends. — The power to declare 
dividends rests exclusively with the board of directors. 
This is perhaps their most important power. It is by the 
size and regularity of the dividend that their success as 
managers is measured; and the failure, on their part, to 
follow carefully provisions of law governing the declara- 
tion of dividends may make them both civilly and crimi- 
nally liable for their acts. 

Statutory restrictions upon the declaration of dividends 
are few and clear, but strict. The cardinal principle which 
they lay down is that dividends must be declared out of 
surplus or net profits. They cannot be declared out of 
capital except in undertakings that are of a wasting nature 
as mining, quarrying, oil production and the exploitation 
of patents, where the purpose of the business is to exhaust 
the marketable value. If for any reason, including losses 
and depreciation, the capital of the corporation has fallen 
below what was originally received by it as representing 
the fair value of the stock issued, the earnings must be ap- 
plied toward rounding out its capital and cannot be dis- 
tributed as dividends. This general rule has been adopted 
by most states to protect not only the creditors of the 
corporation, but its stockholders as well. However, a dis- 
tinction is made between what constitutes the capital ac- 
count and the expense account of the corporation; and it 
is the general rule of the courts to hold that this is a 
matter for business men to determine. Directors fre- 
quently take advantage of this in order to declare dividends 
as often as possible at the risk of impairing the future 
earning power of their corporation. 

The by-laws of the corporation usually restate very 
briefly the statutory provisions of the state of incorpora- 
tion relative to the declaration of dividends, and in many 
cases prescribe the procedure that is to be followed by the 
directors when dividends are to be declared. An example 



186 SECURITIES-ISSUING ORGANIZATIONS 

of the latter type is found in the by-laws of the United 
States Steel Corporation given in Part VI. 

The procedure that is followed in the larger corporations 
in declaring dividends, is about as follows: First, a state- 
ment is secured from the treasurer to ascertain whether the 
net earnings are sufficient to declare a dividend. Second, 
in case the net earnings are sufficient the dividend is de- 
clared by a formal resolution of the directors. This reso- 
lution usually sets forth that the directors of the corpora- 
tion have declared a dividend of a specified per cent of the 
par value of the stock, to be paid on a specified date to 
stockholders of record, as of a date five to ten days in ad- 
vance of the date of payment. Sometimes the dividend is 
stated as so many dollars per share as would be necessary 
with non-par value stock or for any other reason. Third, 
notice is thereupon given the stockholders, and is usually 
also published in the newspapers, although the latter act 
is not required. Fourth, the secretary of the corporation 
closes the stock transfer books, which then furnish the 
treasurer with a list of stockholders who are to receive 
the dividend. Fifth, the treasurer pays the dividend on the 
specified date, usually by check so marked as to indicate 
that it is a dividend, and in this way receives the check 
as a receipt from the stockholder when it has been endorsed 
by him. 

Kinds of Dividends. — The ordinary dividend is paid in 
money and is called a cash dividend. Dividends may, how- 
ever, be paid in some form other than money; as for ex- 
ample, in the form of stock of the corporation, bonds issued 
by it, its scrip or its property. 

If the dividend is in the corporation's stock, it is called 
a stock dividend. The mere distribution of unissued or 
treasury stock pro rata among the stockholders, does not 
constitute a stock dividend, but merely watered stock. The 
amount of stock to be issued through a stock dividend is 



THE CORPORATION — OPERATION 187 

determined by the net earnings available for distribution 
as dividends. Instead of giving to each stockholder a 
cash dividend, the corporation retains the net earnings as a 
sort of additional investment pro-rated among the stock- 
holders, and distributes from its unissued stock a sufficient 
number of shares at par to equal the total of the declared 
dividend. The corporation thereby increases its outstand- 
ing securities by the amount of the stock dividend. Under 
a decision of the United States Supreme Court, handed 
down in March 1920, stock dividends are not income tax- 
able under the Federal Income Tax. As a result of this 
decision there were issued by some 129 corporations and 
companies, between March 1920 and January 1, 1921, stock 
dividends aggregating $777,875,932. Some of these con- 
cerns in this way increased their capitalization four-fold. 
Such a procedure may have the effect of unduly reducing 
the working capital by transferring surplus to invested capi- 
tal and some of our corporations, particularly one large 
rubber company, have been severely criticised on this 
score. 

Bond dividends paid to the stockholders in the form of the 
corporation's own bonds would have the same effect as a 
forced, long-time loan, because the dividends, when once de- 
clared, make the stockholders creditors of the corporation 
to the amount of the dividend. If the corporation then 
gives them its bonds, they remain creditors until the prin- 
cipal is paid. This practice is not very frequently resorted 
to. 

Scrip dividends have the same effect as bond dividends; 
namely, they make creditors out of the stockholders. The 
scrip given the stockholder is merely a non-interest bearing 
promise to pay. It has usually but a short tenor and is 
made payable in cash. 

Property dividends have the same effect as though the 
assets of the corporation were distributed in whole or in 



188 SECURITIES-ISSUING ORGANIZATIONS 

part. They are possible only where the property is divisi- 
ble into units or parcels, as land or the owned securities of 
other corporations. Many corporations, which, during the 
recent war made heavy purchases of government bonds, 
have distributed them among their stockholders in the form 
of property dividends. 

Illegal Dividends. — Whatever form the dividend may 
take, it must be equal for every share of stock of a given 
class and must be distributed to the several classes in the 
order of their claims to priority. Failure on the part of the 
directors to observe this principle, or to guard against im- 
pairing the capital of the corporation or to conform to 
charter and by-law provisions in the declaration of divi- 
dends makes the dividend illegal. Any stockholder may 
enjoin them from paying such a dividend and may hold 
them personally liable for their acts. But dissenting direc- 
tors may protect themselves by having their dissenting 
votes recorded on the minutes of the directors' meeting. 

Other Powers of Directors. — The board of directors 
is frequently empowered to mortgage the property of the 
corporation. When granted, this power is usually limited 
by requiring a two-thirds or three-fourths majority vote 
of the entire board as well as by fixing the maximum 
amount of indebtedness that may be incurred. 

In a few states, such as New York and Illinois, the 
directors may also be given power to adopt by-laws gov- 
erning their own actions. 

Meetings of the Board. — Ordinarily the by-laws of the 
larger corporations provide that the board of directors 
shall have one regular meeting monthly and such special 
meetings as may be deemed necessary. The procedure in 
these meetings is similar to that followed in stockholders' 
meetings. Usually the president of the corporation presides, 
and the secretary acts as secretary of the board meeting, 
but this practice is not universal. In the New York Cen- 



THE CORPORATION — OPERATION 189 

tral and Hudson River Railroad Company there is a special 
presiding officer called the chairman of the board of direc- 
tors. The standing committees may be called upon by their 
chairmen to meet much more frequently than the entire 
board and their procedure is usually somewhat less formal. 

The Corporate Officers 

The function of the officers of the corporation is pri- 
marily that of administration. They constitute the bind- 
ing link between the entrepreneurial and the administrative 
organizations, thus making a live business unit out of the 
artificial person of the corporation. They are at one and 
the same time the agents of the board of directors and of 
the corporation. Unless otherwise stipulated in the statutes, 
charter or by-laws, they are directly responsible to the 
directors for all official acts and are absolutely controlled 
by the board. 

As the work of corporate administration may be readily 
subdivided into such functions as (a) executive direction, 
(b) custodianship, (c) secretarial services, (d) check on 
performance and (e) legal services, the officers are usually 
selected with a view to meeting the requirements of the 
corporation in these matters. In practically all corpora- 
tions there is need of permanent officers to perform the first 
three of these functions. The necessity for the exercise of 
the others may arise only occasionally. Hence, permanent 
officers are not always employed to look after that work, 
temporary assistants being employed by the board of direc- 
tors as the occasion demands. 

The statutes of the states are generally silent concerning 
the officers of the corporation other than directors, who are 
frequently called officers. Even the charter seldom con- 
tains clauses bearing on them. For this reason the by-laws 
should — and as a rule do — go into considerable detail con- 
cerning officers. They usually stipulate the names by which 



190 SECURITIES-ISSUING ORGANIZATIONS 

the officers shall be known, by whom they shall be chosen 
or appointed, what qualifications, if any, they shall possess, 
the length of their term of office and the functions and 
duties that are assigned to them. Any rules or regulations 
upon these points may ordinarily be adopted by the stock- 
holders or may even be left to the discretion of the direc- 
tors. The prevailing elasticity and freedom of action in 
the adjustment of these matters, has! resulted in the adapta- 
tion of the staff of officers to the size of the corporation 
as well as to the nature of the business in which it is 
engaged. 

As a rule the directors appoint, or elect, the officers of the 
corporation and also control them during their incumbency. 
Unless otherwise provided in the by-laws, they need not be 
stockholders; but where they are to serve on the standing 
committees of the board of directors, they must, of course, 
qualify as directors. Their term of office is usually co- 
terminous with that of the directors or for a period of one 
year. Provision is also made for their removal at the will 
of the appointing body, in order that they may be more 
easily controlled and their actions brou^t into harmony 
with the policies of the board of directors. 

General Executive Officers. — Ordinarily the president 
of the corporation is its chief executive officer entrusted 
with the supervision and direction of its operations. He 
is usually made directly responsible for this work to the 
board of directors, but in some corporations he is subor- 
dinate to a managing director, in which case, much of the 
power and authority ordinarily vested in him may be ex- 
ercised by his superior. In addition to these duties he may 
also be the presiding officer at stockholders' and directors' 
meetings and chairman of the executive committee of the 
board. One of the most important duties is to prepare an- 
nual reports on the corporation's affairs for the directors 
and the stockholders. 



THE CORPORATION — OPERATION 191 

Where the corporation is large, it is frequently found to 
be advisable to supply the president with one or more vice- 
presidents who may serve as his immediate administrative 
subordinates. These may be officially designated as " first," 
" second " or " third " vice-president according to their 
number. In some corporations the office of vice-president 
is merely an honorary position whose incumbent has little 
to do with the general administration, while in others the 
vice-presidents are the active and responsible heads of the 
administrative departments immediately subordinate to 
the president in whom the general supervisory and co- 
ordinating power is vested. 

When the position of vice-president is honorary it is 
customary to appoint a general manager and to make him 
directly responsible to the president for the operation of 
the business. Where the board of directors appoints both 
the general manager and the president — an arrangement 
that is found in a few corporations — the status of the 
president assumes more the character of a nominal as 
against an actual executive head. 

Treasurer. — The treasurer is the custodian of the 
corporate funds, securities and valuable financial docu- 
ments. It is also his duty to keep the corporation's books 
of account, to serve as its responsible agent in the disburse- 
ment of funds, and to prepare reports concerning the finan- 
ces of the corporation for the information of the board of 
directors and the stockholders; and he is frequently also 
required to participate in the execution of instruments of 
a financial character su.ch as notes, bonds, etc., issued by 
the corporation. The importance of his position shows 
great variation. In some corporations he is little more 
than the head of the bookkeeping and accounting depart- 
ment, while in others he is made chairman of the finance 
committee and is looked upon as the financial advisor of 
the corporation. 



192 SECURITIES-ISSUING ORGANIZATIONS 

It is obvious that the nature of these duties, which are 
usually definitely assigned to him by the by-laws, place a 
heavy burden of responsibility upon the treasurer. For 
this reason he is nearly always required to give a bond of 
surety to indemnify the corporation for any losses arising 
from misappropriation of funds or from malfeasance in 
office or carelessness in the performance of his duties. The 
amount of his bond is most frequently fixed by the board 
of directors or by the finance committee. 

Much of the liability to which the treasurer is open has 
its origin in common-law rules which, however, have been 
quite generally enacted into statutes. This liability is for 
the most part to the corporation itself, but it may also be to 
the individual stockholders in case these sustain a direct 
personal loss through his acts. Among the acts of the 
treasurer that give rise to liability may be enimierated (a) 
neglect or non-performance of duties and (b) faulty per- 
formance of duties, such as incorrect financial statements 
and reports by the board of directors or by the finance 
committee. 

Secretary. — The secretarial services of which the cor- 
poration has need are entrusted to its secretary who is 
elected by the board of directors. He is practically always 
the secretary of the board as well as the official secretary 
of the corporation, and very frequently also serves as re- 
cording secretary at stockholders' meetings. His mani- 
fold duties include among others the following: 

1. To arrange for meeting places and to issue notices for 

regular and special meetings of the board of directors 
and of the stockholders 

2. To make and to preserve accurate and complete minutes 

of the proceedings of these meetings 

3. To preserve the certified copy of the charter of the cor- 

poration and of the latest revised by-laws 

4. To issue stock certificates as directed and to keep an ac- 

curate record of stockholders 



THE CORPORATION — OPERATION 193 

5. To have the custody of the corporate seal and to affix it 

to all documents requiring the official signature of the 
corporation 

6. To cause to be prepared and to transmit to federal and 

state authorities all official reports required of the 
corporation. 

In the larger corporations this multitude of duties — 
most of which must be performed on specified dates fixed 
by the statutes, the charter and the by-laws — necessitates 
the preparation by 'the secretary of a chronological 
schedule. This schedule is called the corporate calendar. 
It is usually in the form of a book, a card index or some 
other form or memorandum that reminds the secretary that 
on a specified day he is to perform certain formal matters 
pertaining to the corporation's official business, such as 
the mailing of notices for directors' and stockholders' 
meetings, holding such meetings, preparing and transmit- 
ting reports, closing and reopening the stock books, paying 
dividends, etc. Such a calendar is almost indispensable to 
a corporation doing a broad interstate business if for no 
other reason, because of the great number of state reports 
that are required of it. 

For the proper performance of most of the duties 
enumerated above, the secretary is required to keep sepa- 
rate and distinct records. These with the addition of 
the books of account maintained by the treasurer, com- 
prise the corporate books. Among them the most impor- 
tant are (a) the minute book, (b) subscription list, (c) 
stock certificate book, (d) stock ledger and transfer book, 
and (e) the dividend book. 

In the minute book the secretary keeps a record of the 
proceedings at directors' and stockholders' meetings. Certi- 
fied copies of the charter and the by-laws are usually in- 
scribed on the first pages of the book. Accuracy is essen- 
tial in recording minutes because they serve as legal evi- 



194 SECURITIES-ISSUING ORGANIZATIONS 

dence in court proceedings. In most instances it is found 
advisable to keep a separate minute book for each body. 

The subscription list is merely a record of subscriptions 
for stock made by stockholders before certificates can be 
issued. Such subscriptions constitute contracts between 
the corporation and the subscribers, and the latter remain 
liable until the terms of the contract are fulfilled. 

The stock certificate book is similar to a check book. It 
contains stock certificates with corresponding stubs con- 
secutively numbered. When a certificate is issued by the 
secretary there is noted on the stub the name of the person 
to whom it was issued, the date and the number of shares 
represented by the certificate. When the shares are trans- 
ferred the old certificate is surrendered and canceled and 
a new one is issued. When a certificate is destroyed a new 
one may be issued upon proof of destruction or loss of 
the original and deposition of an indemnity bond by the 
claimant. In small corporations the stock certificate book 
is frequently the only stock record that is maintained. 

The stock ledger and transfer books may be one and the 
same book, but in some of the states separate books are 
required by law. Both are intended to preserve an ac- 
curate record of the stockholders and of the stock held by 
them. The ledger must show the names and addresses of 
the stockholders of record, alphabetically arranged, the 
amount of stock held and from whom and when it was ac- 
quired, and to whom transfers, if any, have been made and 
when. The balance of stock held by each stockholder as 
shown by the ledger determines the number of votes to 
which he is entitled and the amount of dividends that he is 
to draw. The transfer book consists usually of a record of 
transfers together with the actual instruments by means of 
which transfers were effected, bound into book form. The 
larger corporations ordinarily keep only a record of trans- 
fers and leave the other work to special transfer agents and 
registrars appointed for that purpose. 



THE CORPORATION — OPERATION 195 

The rules of the New York Stock Exchange require that 
the work of registration and transfer shall not be performed 
by the same agency. The work of the transfer agent con- 
sists of examining the endorsements or titles to stock certifi- 
cates which are transferred from one owner to another. 
The registrar merely records the transfers and registers the 
securities that the corporation places on the market. To- 
day, trust companies make a specialty of both of these 
services and are usually designated by the secretary of the 
corporation to act as its agent in these matters. 

The dividend book supplies a record of all dividends on 
all classes of stock that have at any time been declared. 

Auditor or Comptroller. — It is neither wise nor desira- 
ble that the stockholder should be without some means of 
checking up on the management of the corporation. This 
check is usually supplied through a general auditing of 
accounts. Audits are, as a rule, made annually, quarterly 
or at irregular intervals. In Europe the auditing must be 
done by an independent auditor who is usually a govern- 
ment official. But in this country the laws do not provide 
for independent audits. In the smaller corporations it is 
the practice to employ public accountants to perform this 
service as it is deemed necessary. In the larger corpora- 
tions the auditor, or comptroller as he is also called, is an 
officer of the corporation. His duties vary greatly from 
corporation to corporation. Where an auditor is among the 
officers, the treasurer's work is confined quite largely to 
custodianship and disbursement of the funds, while the ac- 
counting and bookkeeping is in the hands of the former. 
He is also frequently required to authorize or countersign 
all vouchers for expenditures before the treasurer may pay 
out money on them. The whole matter is one of adjust- 
ments that are prescribed in the by-laws or by the directors. 

Counsel. *— Practically every corporation has need of 
legal services at some time. Large corporations are in liti- 



196 SECURITIES-ISSUING ORGANIZATIONS 

gation most of the time, and they are also constantly in 
need of legal advice to guide them through the labyrinth of 
laws which surround them. Most large corporations conse- 
quently include a counsel among their officers; while the 
smaller ones do without an official counsel, but usually re- 
tain some attorney to advise them as the need arises. 

The whole structure of the corporation, thus, rests upon 
the principle of a representative type of government after 
which it is closely modeled. To be sure, it makes use of all 
of the advantages that the principle of representation offers 
in a most admirable way; but unfortunately, chiefly be- 
cause of lack of proper regulation and control by state 
governments in this country, it has been too frequently 
utilized for purposes of manipulation, fraud and question- 
able practices. The next chapter will be devoted to a 
brief presentation of this aspect of the corporate form of 
organization. 



CHAPTER XI 
USE OF THE BUSINESS CORPORATION 

The corporation is today, without question, the favorite 
form of ownership organization in the United States for 
business establishments of moderate and large size. This 
preference was so noticeable among manufacturing estab- 
lishments in 1909 that it was strongly commented upon in 
the Report on Manufactures of the Bureau of the Census 
in that year. This report says: "The most important 
distinction shown is that between corporate and all other 
forms of ownership. Of the total number of establishments 
reported as engaged in manufacturing industries in 1909, 
25.9 per cent were under corporate ownership. The corres- 
ponding figure for 1904 was 23.6 per cent. While corpora- 
tions thus controlled only about one-fourth of the total 
number of establishments, they gave employment to a 
large proportion of all wage earners reported, namely, 75.6 
per cent in 1909 and 70.6 in 1904. The value of the prod- 
ucts of the factories operated by corporations represented 
79 per cent of the total value of products for all establish- 
ments in 1909 and 73.7 per cent in 1904. These figures 
show^ that even in this short period of five years the cor- 
porate forn^ of ownership increased so greatly that it repre- 
sented an appreciably larger proportion of the manufactur- 
ing interests of the country in 1909 than in 1904."^ But 
this growth in the use of the corporate form of ownership 
for manufacturing establishments, is still continuing. In 
1914 the position of the corporation in this type of industry 
was 28.4 per cent of the number of establishments, 80.30 per 

1 Thirteenth Census of the United States— Abstract (1909), p. 461. 

197 



198 SECURITIES-ISSUING ORGANIZATIONS 

cent of the total number of wage earners employed and 
83.2 per cent of the total value of all products. 

Nor is it in the manufacturing industries alone that the 
corporation is dominant. In mining, transportation and 
public utilities, and in finance it enjoys an equally eminent 
position. This is well shown by the following table com- 
piled from the income tax returns for 1917. 

Number of Corporations in Given Industries Compared with 
Number of Individuals Reporting Income from these In- 
dustries in 1917 2 





Corporation returns 


Individual 


Industries in 
which engaged 


Number 

showing 

profit 


Number 
showing 
no profit 


Total 
number 


Percent 

indus- 
tries 


returns 
Number 


Agriculture and re- 
lated industr's .... 

Mining and 

quarrying 

Manufacturing 

Construition 

Transportation and 
pubUc utilities .... 

Trade 


5,633 

6,371 

58,788 
7,073 

18,673 
72,947 

12,160 
49,165 

1,269 


4,027 

6,578 

20,854 

3,670 

7,769 
18,110 

6,434 
19,197 

32,708 


9,660 

12,949 
79,642 
10,743 

26,442 
91,057 

18,594 
68,362 

33,977 


2.7 

3.7 

22.7 

3.1 

7.5 
25.9 

5.3 
19.5 

9.6 


251,838 

1,882 
22,850 
12,791 

6,843 
134,862 

111,207 
3,065 

33,450 

33,738 


Personal service 

and professions — 
Finance 


Inactive and not 
otherwise defined . . 

Combination of 
two or more 


Totals 


232,079 


119,347 


351,426 


100.0 


612,529 





2 Prepared from Statistics of Income (1917) compiled by the Com- 
missioner of Internal Revenue, U. S. Treasury Department. 



Even the field of trade, that time-honored precinct of the 
individual merchant, is rapidly succumbing to this superior 
type of organization. Only in agriculture and related 



USE OF THE BUSINESS CORPORATION 199 

industries and for personal service and the professions does 
it appear ill suited. There are, nevertheless, many large 
cattle ranches in the West, and dairying undertakings in 
the East operating as corporations. It is used but spar- 
ingly for personal service enterprises; and it is doubtful 
whether it can make much headway in the professions, for 
some of the states, including New York, bar it to the 
latter entirely. 

While the census report, referred to above, ascribes this 
rapid growth in the use of the corporation primarily to 
the advantages that it affords in the matter of procuring 
capital, other factors also have stimulated it. These are 
of two classes: (1) Those inherent in the type of organiza- 
tion itself, which have already been described in a preceding 
chapter under advantages of the corporate form; and (2) 
external influences that favor it in one way or another. 

These external forces arise for the most part out of the 
peculiarities of the present industrial system. Technical 
progress, for example, has made large-scale production pos- 
sible by introducing machinery and factory methods into 
manufacture. But large scale production without an avail- 
able market and a source of raw materials is of itself not 
practical. It does not become a factor in industrial or- 
ganization until the means of communication and transpor- 
tation have been brought into technical coordination, so 
that a wide market for finished products and an ample 
supply of raw materials may be reached. Commercial prac- 
tices and aids in the nature of finance, extension of credit, 
etc., also are factors influencing the growth of business 
establishments. Big establishments then are the outstand- 
ing characteristic of modern industry, and since big estab- 
lishments require large accumulations of capital they adopt 
a form of ownership organization that can meet this prime 
requirement with the greatest ease. This the corporation 
does admirably and with a mimimum of risk. 



200 SECURITIES-ISSUING ORGANIZATIONS 

The policies adopted by the several states with regard 
to incorporation also, have by no means been negligible 
factors in promoting its more general use. The sale by 
state legislatures of special charters has practically ceased, 
but there still exists among a few of the several states a 
sort of keen competition to secure the charter-granting 
business of the country, which, because of the initial fran- 
chise tax, can be made very remunerative. It is needless 
to point out that such competition is conducted on the 
principle of giving the greatest benefits for the least cost. 
Consequently, these states encourage incorporation and 
stimulate it by adopting tax laws under which may be se- 
cured the broadest grant of powers with a minimum amount 
of restriction, control and onerous obligations. Some of 
the states that have set up " bargain counters " over which 
to engage in the business of charter selling are New Jersey, 
Delaware, Maine and West Virginia. New Jersey, which 
until 1913, had been called the home of American monopo- 
lies, for some years preceding that date derived about 60 
per cent of its annual revenue for state purposes from its 
corporation franchise tax — a tax which was no heavier 
or lighter than was to be found in a considerable number of 
states but which was gladly paid for holding company 
privileges and other advantages. The other three states 
also draw a substantial proportion of their funds from the 
same source. When, in 1913, New Jersey revamped her 
corporation laws making them less desirable from the 
standpoint of " big business," Delaware became its heir. 
This little state, with a population of but a few hundred 
thousand, during a single month — July, 1920 — granted 
charters to corporations whose aggregate authorized capital 
stock reached the staggering sum of $1,350,000,000 repre- 
senting 80 per cent of the nation's total for that\ month. 

Even the Federal Income Tax Law of 1918 fosters in- 
corporation by placing a heavier burden of taxes upon 



USE OF THE BUSINESS CORPORATION 201 

other forms of ownership. Thus, in a letter to the Ways 
and Means Committee of the House of Representatives in 
Washington, (March 1920) Mr. Houston, the Secretary of 
the Treasury said: " In 1918 the members of a well-known 
partnership paid nearly $1,125,000 more taxes than they 
would have paid had their business been organized as a 
corporation." 

So long as the corporation remains the favored type of 
organization for big business these influences will continue 
to make themselves felt. Big business demands advan- 
tages that the personal ownership types of organization 
do not offer, and to attain them it will not hesitate to in- 
fluence legislation to secure the passage of laws under 
which it may most effectively carry out its operations and 
plans, whether these may or may not be for the best in- 
terests of the public. It is under the pressure of these de- 
mands that certain clearly defined types of corporations 
have been given the statutory sanction, under which they 
have been molded into shape by the exactions of economic 
conditions. 

Types of Corporations. — Viewed from the standpoint 
of its structural arrangements, the business corporation 
exhibits two distinct types: (1) the simple corporation; and 
(2) the securities-holding corporation. 

Where a corporation is authorized to carry on a busi- 
ness undertaking, but is not specifically granted the power 
to hold or acquire the securities of other corporations, it 
is a simple corporation. Under the English common law 
all business corporations are of this type; and under the 
statutes of most of the several states it is still considered 
to be the ordinary type. While this does not preclude the 
simple corporation from establishing certain intercorporate 
relations, such as interlocking directorates or a community 
of interest, it does preclude all arrangements whereby a 
relationship, giving to one corporation a claim to either 



202 SECURITIES-ISSUING ORGANIZATIONS 

the income or assets of another, or the legal control over 
it, may be created through the use of securities, particu- 
larly of the ownership type. 

Such corporations draw their income only from the busi- 
ness plants and equipment, the legal title to which is 
vested directly in them. Consequently they must operate 
this economic capital directly, in the same way as an in- 
dividual proprietor operates his business establishment. 
Nothing may stand between them and the direct control 
of the property that they own. It follows, therefore, that 
they form the organizations that are originally employed 
to effect the conversion of economic capital into securities 
that thereupon become available as business assets for the 
securities-holding corporations. 

The preceding chapters that describe the corporate form, 
its securities, formation, and internal organization refer 
primarily to the simple corporation. It is more numerous, 
by far, both in this country and in foreign lands, than 
is the other type. Numerically, it makes up the great bulk 
of corporate organizations. But in so far as prestige, power 
and influence over the business life of the community is 
concerned, it must concede the premiership to the securi- 
ties-holding type. 

The Securities-Holding Corporation. — The securities- 
holding corporation — or " holding company " as it is most 
commonly called in the United States — differs from the 
simple corporation only in that it is empowered by statute 
or charter provision to purchase, hold, assign, mortgage, 
pledge or otherwise dispose of the securities of other cor- 
porations. It may thus acquire and own, either ownership 
or creditor securities or both. When it acquires the owner- 
ship type of securities (stocks) it naturally becomes a 
stockholder, and under most holding company laws in this 
as well as in foreign countries, it is accorded the same 
rights and privileges that any other stockholder may pos- 
sess, including the right to vote. 



USE OF THE BUSINESS CORPORATION 203 

In the United States the securities-holding corporation 
first made its appearance as early as 1832, when the Balti- 
more and Ohio Railroad Company was authorized by 
special act of the legislature of the state of Maryland to 
acquire and hold the shares of stock of the Washington 
Branch Road. From that time on until 1888, when the state 
of New Jersey first passed a general holding company law, 
the holding power was sporadically granted by a number 
of state legislatures. The state of Pennsylvania, for ex- 
ample, by several acts extending over the period from 1853 
to 1870 empowered the Pennsylvania Railroad Company 
to acquire the stocks of other roads. This railroad, by 
judiciously exercising the privilege, succeeded in building 
up the extensive network of railway lines that is now 
known as the Pennsylvania System. However, it was not 
until 1897, when business began to recover from the effects 
of the disastrous panic of 1893 and the subsequent years of 
depression, that the holding company came into general 
use. Most of the great holding companies that are such 
a prominent feature of our industrial system were formed 
since 1900. The United States Steel Corporation with a 
capital stock of $1,100,000,000 was formed in 1901; the 
American Locomotive Company with $50,000,000, in 1901 ; 
the American Agricultural Chemical Company with $100,- 
000,000 capital stock, in 1899 ; the American Can Company 
with $88,000,000 capital stock, in 1901; the old American 
Tobacco Company with $100,000,000 capital stock, in 1904; 
the American Smelting and Refining Company, in 1901, 
and the International Mercantile Marine Company with 
$120,000,000 capital stock, in 1902. Indeed, the record of 
holding company incorporations made in the year 1901 has 
thus far not been surpassed. In that year, in the month of 
April alone, charters, authorizing the issuance of stock 
to the amount of $1,619,000,000 were recorded, chiefly in 
the state of New Jersey. The great majority of these 
Were for holding companies. 



204 SECURITIES-ISSUING ORGANIZATIONS 

The holding-company clauses that are to be found in the 
corporation laws of a number of the states today, are of 
two general types: first, those that grant the holding power 
to all corporations chartered by the state, regardless of 
whether it may or may not have been requested ; and second, 
those under which it will be granted only upon a specific 
request, and upon inclusion of a provision to that effect 
in the charter. The laws of the states of New Jersey, Dela- 
ware, Maine and West Virginia represent the former and 
those of New York the latter. 

The New Jersey law, in effect prior to 1913, was as 
follows: ^ ''Any corporation may purchase, hold, sell, as- 
sign, transfer, mortgage, pledge or otherwise dispose of the 
shares of the capital stock of, or any bonds, securities or 
evidences of indebtedness created by any other corporation 
of this or any other state, and while owner of such stock 
may exercise all the rights, powers and privileges of owner- 
ship, including the right to vote thereon." 

In 1913 this section was practically repealed but was 
restored in substantially its original form in 1920. It is 
representative of similar laws in other states. 

Application of the Securities-Holding Principle. — 
While the simple corporation effects the primary, or orig- 
inal, " securitization " * of economic capital, that includes 
within the concept both real and money capital, the hold- 
ing corporation institutes a secondary " securitization " of 
capital in its widest concept; namely, as including real 
economic goods, money and securities. Because of this 
diversity of underlying capital, there is a variety of uses 
to which the securities-holding principle, as embodied in 
the holding company, may be put. In the first place, it 
may be employed to effect a subdivision of legal title of 
ownership in the capital of a business corporation, without 

3 General Corporation Law of New Jersey, No. 51. 

4 The meaning of the word "securitization" has been fully ex- 
plained on page 97. 



USE OF THE BUSINESS CORPORATION 205 

disturbing the final clai^ on either the income accruing to 
that capital, or on the capital itself, as assets. This we 
shall call simply subdivision of legal title. In the second 
place, it may be used for the purpose of substituting the 
securities of the holding corporation for the securities of 
other corporations, in the hands of the stockholders of the 
latter. This we shall refer to as the process of securities- 
substitution. It may be brought about out of a desire to 
participate in the income of other corporate enterprises, or 
because of special problems of financing that are best 
solved through the medium of a securities-holding organi- 
zation. 

Subdivision of Legal Title. — A corporation that possesses 
the stock holding privilege frequently finds it advantageous 
to transfer the legal title to a part of its business capital 
to another corporation, but at the same time, while so 
doing, it desires to retain its standing claim on the income, 
and deferred claim on the assets thus transferred. Its 
method of procedure in this case is to cause a new corpo- 
ration to be created and to transfer to it the capital in 
question, receiving in return therefor all the authorized 
capital stock of the new corporation. The original corpo- 
ration is then called a parent company and its child a 
daughter or subsidiary. It is quite obvious that such a 
procedure need not affect the unity of purpose of the two 
corporate entities, for the subsidiary is controlled by the 
directors of the parent. Neither does it affect the claim 
on income or assets of the stockholders of the parent be- 
cause their securities remain unchanged, as also does the 
aggregate of assets supporting them. Such a transaction 
cannot, therefore, be called a true substitution of securities. 

The United States has proved a very fruitful field for 
this use of the holding company. The large nimiber of 
states, each a sovereign judicial jurisdiction, has brought 
about a condition such that a corporation frequently finds 



206 SECURITIES-ISSUING ORGANIZATIONS 

itself at a considerable disadvantage in doing business in 
a state other than that of incorporation. In order to over- 
come these disadvantages it may cause a subsidary to be 
created in the state in question. This was the practice 
followed by the old Standard Oil Trust. In like manner, 
subsidiaries of this type are frequently organized to take 
over and operate the foreign branches of corporations. 
This is common among foreign trade concerns. The Gen- 
eral Motors Corporation conducts its Canadian business 
under the General Motors Company of Canada, Ltd. and 
its European business under the General Motors Com- 
pany, Ltd., organized in England. There are in the 
United States also many concerns created and owned by 
foreign parent companies. In all such cases the total 
authorized capital stock of the subsidiary is usually held 
by the parent company. 

The principle of subdivision of legal title is also fre- 
quently resorted to in order to facilitate the operation 
and administration of particular divisions of the business. 
For instance, the United States Steel Corporation, in 1906, 
organized the Indiana Steel Company to erect and operate 
its great plant at Gary, Indiana, and in the same year 
the Universal Portland Cement Company to take over 
its cement plants, and in 1917 the Federal Shipbuilding 
Company to take over the shipbuilding plant erected by 
the American Bridge Company, which is itself a unit of 
the Steel Corporation. The General Motors Corporation 
has in like manner organized the McLaughlin Motor Car 
Company, Ltd. of Canada, the General Motors Truck 
Company, the General Motors Acceptance Corporation and 
others. E. I. du Pont de Nemours and Company similar^ 
organized the Du Pont Engineering Company with a capital 
of $7,000,000 to construct a nitrate plant for the govern- 
ment at Nashville, Tennessee, and also the E. I. du Pont 
de Nemours Export Company to carry on its export trade. 



USE OF THE BUSINESS CORPORATION 207 

Another use of this type of organization by manufac- 
turing corporations, is to place the legal title of properties 
characterized by the wasting nature of their assets under 
a subsidiary. Mining and lumbering enterprises fall gen- 
erally into this class. It is also found to be useful where 
an industrial corporation constructs and operates public 
utilities which, in most of the states, must be incorporated 
under special laws. Housing and land development under- 
takings are also conducted under this plan. 

The practice of subdividing the legal title to corporate 
property is, however, very susceptible to abuse and mis- 
use. The extensive use of the so-called " bogus independent 
concerns " by many of our large predatory corporations, 
is an illustration of this. Most of these schemes have been 
devised to circumvent the provisions against restraint of 
competition, of the Sherman Anti-Trust Law and others. 
Many examples might be cited to illustrate this particular 
use of subsidiaries, but a few must suffice. In 1897 the 
Electric Lamp Combine is reputed to have organized the 
Royal Incandescent Lamp Company, and took pains to 
make it appear to be an independent concern. The Ameri- 
can Tobacco Company in 1903 organized the Queen City 
Tobacco Company, and the National Cash Register Com- 
pany the Universal Cash Register Company for similar 
purposes. 

It must be borne in mind that there is a clear distinc- 
tion between this type of subsidiary, which is created and 
owned in its entirety by the parent, and one that has been 
acquired through purchase of stock from original stock- 
holders. The latter may be accomplished through the 
medium of securities-substitution, a phenomenon that does 
not occur in the former case where the distribution of in- 
come is effected through the medium of the outstanding 
securities of the parent company which remain undisturbed 
by the procedure of subdivision of legal title. Of course, 



208 SECURITIES-ISSUING ORGANIZATIONS 

it is possible for the parent to sell a part of the securities 
of its subsidiary, retaining only enough to insure control, 
but such a procedure would hardly effect a substitution of 
securities. It would amount simply to a conversion of 
stock assets into cash without reducing the amount of se- 
curities of the parent company held by investors who are 
the final participants in its income. The securities of the 
subsidiary that are sold to investors would be merely an 
addition to the sum-total of securities through which in- 
come is to be distributed to the ultimate recipients. 

Substitution of Securities. — But how different from the 
above is the effect produced where a new corporation is 
formed to acquire the securities of other corporations and 
to place its own in their stead. This is the process of 
securities-substitution. The concern whose stock is thus 
acquired is usually called a subsidiary of the holding 
company, when the latter has a controlling interest in it, 
and an affiliated company, if a substantial, but minority, 
interest is held. 

The simplest case of securities-substitution occurs where 
a holding company acquires the securities of a single sub- 
sidiary. Should the holding company possess all of the sub- 
sidiary's securities and issue in their stead a like amount 
of securities that are identical in all respects, the substi- 
tution cannot be said to have any marked effect on the 
distribution of income or control over business capital, 
for the ultimate supporting capital back of the new securi- 
ties would be that which was back of the old. In order to 
bring about any change in income distribution in a case 
such as this, there would have to be some difference be- 
tween the two securities. For example, the holding com- 
pany might substitute a limited dividend, non-voting pre- 
ferred stock in place of most of the common stock of the old 
company, while the small amount of its common stock is 
held by the promoters for purposes of control or enjoyment 



USE OF THE BUSINESS CORPORATION 209 

of all excess profits. This might conceivably be of advan- 
tage to the promoters, but of disadvantage to the body of 
stockholders generally. Indeed, such operations as these 
are most frequently undertaken for purposes of financial 
manipulation in order to bring about an artificial rise or 
decline in the market value of the securities to the profit 
of the promoters. However, this is usually only a tem- 
porary expedient that results finally in the complete dis- 
solution of one or the other corporation. 

Because of the great number of concerns frequently in- 
volved, the practice of securities-substitution, as employed 
in modern business, presents a much more complex problem 
than that above outlined. Where two or more subsidiaries 
are involved in a securities-substitution operation, the in- 
evitable result is an economic combination of the basic or 
underlying capital, a legal combination of the income de- 
rived from that capital and a possible control over it. 

Consolidation of Corporations. — In the financial world 
the term consolidation is used to signify the process of 
bringing a number of existing corporations, or their business 
establishments under the control and direction of a single 
corporation. It may be effected through stock ownership 
or fusion. In the former case the controlled units retain 
their legal entity as corporations, but in the latter, they are 
dissolved and their business establishments become the 
direct property of the combination unit. Fusions may be 
made either through merger or amalgamation, a process 
which may or may not involve the substitution of securi- 
ties. 

A merger takes place when one ownership organization 
absorbs the properties, real and personal, assets and busi- 
ness of one or more other organizations that are there- 
upon dissolved. Thus, if of the three companies A, B, 
and C, the former. Company A, should acquire by merger 
the properties of companies B and C, company A alone 



210 SECURITIES-ISSUING ORGANIZATIONS 

would retain its identity while the other two would dis- 
appear entirely. The absorption of the Central District 
Telephone Company by the Bell Telephone Company of 
Pennsylvania illustrates this principle. The latter com- 
pany was incorporated in 1879 as the Bell Telephone 
Company, of Philadelphia and its name changed to the 
present title in 1907. In 1918 it acquired the properties 
and business of the Central District Telephone Company 
and assumed its funded debt outstanding. 

An amalgamation occurs where a new organization is 
formed for the specific purpose of taking over the properties, 
assets and business of existing units, thereby leaving the 
newly formed unit as the only existing entity. Thus, in 
1896, the New York Telephone Company was incor- 
porated to acquire the properties and business of the 
Metropolitan Telephone and Telegraph Company and the 
Westchester Telephone Company. And more recently, in 
1911, the Mountain States Telephone & Telegraph Com- 
pany was formed to absorb the Colorado Telephone Com- 
pany operated in Colorado and New Mexico and the Rocky 
Mountain Bell Telephone Company in Utah, Idaho, Mon- 
tana and Wyoming. The amalgamation was effected 
through the acquisition by the new company of the stock oi 
each of the constituent companies, and with the transfer to 
it of all the physical properties, franchises, etc., of the 
former companies, which were thereupon dissolved. 

However, in practice little attempt is made to differen- 
tiate between these several methods of consolidation, and 
the terms " amalgamation," " merger " and '' consolidation " 
are frequently used interchangeably. 

Prior to the general adoption of the holding principle 
in ownership organization, the merger and amalgamation 
were resorted to to combine existing units on a large 
scale into a single large operating organization. Such was 
the method employed in forming the old United States 



USE OF THE BUSINESS CORPORATION 211 

Leather Company in 1893 with a capitalization of 
$120,000,000, consisting of $60,000,000 common and $60,- 
000,000 preferred stock. The old United States Cordage 
Company, the National Starch Company and the American 
Malting Company likewise were the result of merger 
operations. It was also employed in the formation of the 
Standard Oil Trust of 1882. 

The earlier consolidations were usually effected without 
the use of the holding company. In the later ones^ how- 
ever, the process has frequently begun through the acquisi- 
tion of a small amount of stock by the absorbing unit 
which, by gradually increasing its stockholdings soon be- 
comes the sole stockholder and thereupon votes to dissolve 
its subsidiary. This practice has been common among our 
industrials, and particularly with the General Electric 
Company. This company at the time of its formation in 
1892 arose out of an amalgamation of the Edison General 
Electric Company, the Thompson-Houston Electric Com- 
pany and the Thompson-Houston International Electric 
Company. By 1902 the General Electric Company had 
acquired all of the capital stock of the Sprague Electric 
Company, and a year later of the Stanley Electric Manu- 
facturing Company which were then merged with it and 
dissolved. In 1912, the company similarly dissolved the 
National Electric Lamp Company and its subsidiaries and 
merged their properties with its own. 

To bring about a consolidation of this kind requires 
either an outright sale of the business and its properties 
to the absorbing company, or the possession by it of all the 
outstanding shares of stock of the companies that it desires 
to consolidate. These conditions militate against its more 
general use in this country and tend to favor combinations 
bound together by means of holding companies that own a 
majority of the stocks of their subsidiaries. But in Euro- 
pean countries, especially in Germany, it is still the favor- 



212 SECURITIES-ISSUING ORGANIZATIONS 

ite means of building up the modern great business units. 
Since the war it has played a prominent part in forming 
the gigantic combinations that have sprung up in the 
German steel, chemical and electrical industries, although 
the holding company principle seems, also, to be gaining 
favor. 

However, further explanation and description of special- 
ized uses of the modern corporation would lead into a 
discussion of securities-substitution companies and com- 
bination organizations. Before going into these subjects it 
will be necessary to explain the voluntary association in 
the form of trust, as a type of ownership organization. 



CHAPTER XII 
THE BUSINESS TRUST 

General. — It is a well recognized principle of common 
law that a person may temporarily vest the legal title 
to property together with the exclusive right of its manage- 
ment and control in another as trustee, reserving for him- 
self or others only the profits or benefits that may accrue 
to such property while under the control of the trustee. 
Such an act creates a trust estate. The principle has its 
origin in the right of private property and inheritance, and 
in its simplest form, it is employed as an instrument of 
the courts to preserve property conveyed, as by will, to 
minors during their minority. It is of importance in this 
work inasmuch as it has come to be used as a form of 
organization for the conduct of business enterprises. 

Definition. — The business trust may be defined as a 
business estate in the custody of a trustee, who holds the 
legal title thereto with the beneficial interest in others who 
are the beneficiaries. The settlors, or creators, of a trust 
embarked in business may be the sole beneficiaries where 
they contract with each other as to how, severally, they 
may acquire that status. 

Trusts are essentially of two types, active and simple. 
In the simple or " dry " trust the title to the property is 
vested in a trustee for the benefit of another without stipu- 
lating or prescribing in the contract the nature of the 
trust, but leaving this matter to the construction of law. 
In the active trust, the founder or settlor prescribes in 
the trust agreement the conditions under which the trust 

213 



214 SECURITIES-ISSUING ORGANIZATIONS 

is to be conducted, leaving to the court of equity only the 
duty of enforcing the terms of the agreement in order 
that the purpose for which the trust was created may not 
be frustrated. It is the active trust that is employed for 
the conduct of business. 

The structural elements of the business trust may now be 
summarized as follows: 

1. The settlors who draw up the agreement making a trust 
estate of certain business property and defining the manner 
in which such property is to be owned and managed and 
what disposition shall be made of it 

2. One or more trustees whom the settlors vest with the 
legal title to the property and with the power of manage- 
ment and control over it subject to the provisions of the 
trust agreement 

3. The beneficiaries who are defined in the trust agree- 
ment, who possess the equitable interest in the trust estate 
entitling them to the net profits accruing to it and who 
usually have the power to fill vacancies on the board of 
trustees. 

Formation. — As seen from the preceding paragraph, a 
trust embarked in business is the result of a contractual 
agreement between the settlors and the trustees. The rules 
of common law, in general, give to the settlors the right to 
place property in trust and to specify the conditions that 
shall govern its control and management. Thus the in- 
strument creating the trust, commonly called the trust 
agreement, is to this form of business organization what 
the charter is to the corporation, or the articles of associa- 
tion to the joint stock company, namely, its fundamental 
grant of rights and powers. 

Since a state may not generally limit the freedom of 
contract for a purpose other than to protect the public health 
safety or morals; it follows that the trust agreement "may 
provide for practically any form of organization that 



THE BUSINESS TRUST 215 

places the legal title in the trustees and reserves the bene- 
fits to others. Practically the only limitation placed upon 
the conditions of the trust agreement is with reference to 
permanence. In practically all states the rule against per- 
petuities is applied to trust estates. There are no laws 
prescribing procedure, or limiting the number of settlors, 
trustees or beneficiaries. In fact, as great a latitude exists 
in the matter of drafting the details of organization for 
the business trust as obtains in the ordinary partnership. 

The Trustees 

Of the three elements that go to make up the organiza- 
tion of the business trust — settlors, beneficiaries and 
trustees — the trustees are responsible for the management 
and direction of the trust estate, the settlors merely make 
the contract creating the trust and disposing of the estate at 
its expiration, while the beneficiaries have the equitable 
interest in the profits. 

Trustees as Managers. — The power of management and 
direction of the trust estate vested in the trustee under a dry 
trust, is determined by common law rules. These rules place 
upon him the same responsibility as would apply to an in- 
dividual proprietor, or to ordinary general partners in 
cases where there are several trustees. It thus includes 
full and unlimited liability on all contracts entered into on 
behalf of the trust estate and full and unrestricted power 
of management and control, but exercised under the gen- 
eral supervision of a court of equity whose duty it is to 
see to it that the purpose of the trust is fulfilled. The 
trustee cannot delegate to another any part of his dis- 
cretionary power, that is, his responsibility for final de- 
termination of contractual rights and duties. He may, 
assign to others, however, the performance of purely minis- 
terial duties, but is always responsible for their acts in like 
manner as a principal is responsible for the acts of his 



216 SECURITIES-ISSUING ORGANIZATIONS 

agent. The bar against the delegation of discretionary 
power is on the theory that the trustee is not an agent, 
but is himself a principal and the court, therefore, refuses 
to recognize the responsibility of any one other than the 
trustee. Where there are two or more trustees, they must 
act jointly, as a unit, in all discretionary matters. 

However, these general rules of law, that are applicable 
in case of a simple or dry trust may be considerably 
altered in active trusts by the introduction of specific pro- 
visions into the trust deed or agreement. In this way the 
trustees may be authorized to delegate general managerial 
power to others ; and it may also be provided that a desig- 
nated majority of the trustees shall have power to act for 
and bind the trust estate. However, all such instruments 
will be strictly interpreted by the courts. Thus, where a 
majority is authorized to govern, it is ordinarily held that 
they are not thereby empowered to act without consulting 
the others, who must at least be given an opportunity to 
be heard. As a result of these general rules a high degree 
of cooperation, such as might obtain in a well ordered 
partnership, is essential where there is more than a single 
trustee. 

Appointment of Trustees, Removal, Successors. — In an 
active trust the original trustee, or trustees, are appointed 
by naming them in the trust agreement to which they be- 
come parties. Other than the natural mimimum limit of 
one, there is no rule prescribing the number of trustees 
that may be appointed. This is left entirely to the settlors, 
who, of course, should bear in mind the impracticability of 
a large number in view of the requirement for joint action. 

The term of office of trustees may be prescribed by the 
trust deed, but it cannot extend beyond the legal life term 
of the trust. Where trustees are several in number it is a 
common practice to classify them. For example, in the 
old Standard Oil Trust nine trustees were appointed and 



THE BUSINESS TRUST 217 

the term of office was fixed at three years, but they were so 
grouped that three were to be elected annually by the 
beneficiaries. This arrangement for the selection of suc- 
cessors of trustees is common with many business trusts, 
each beneficiary being accorded a number of votes com- 
mensurate with his share of the beneficial interest in the 
trust. If no specific provisions are made for the appoint- 
ment of trustees' successors that power lies exclusively 
with the court of equity. 

Since the trustees are themselves principals and not 
agents of the settlors or the beneficiaries it follows that the 
latter ordinarily do not possess the power of removal of 
trustees. But any one of the beneficiaries or trustees may 
appeal to the court which will remove the accused trustee 
when sufficient cause for removal has been shown. It has 
also been held valid for the beneficiaries and one trustee, 
acting together, to remove another trustee for sufficient 
cause where provision for this was made in the trust deed. 

It is thus fairly well established that the creators of 
the trust may stipulate in the trust agreement how trustees 
and their successors are to be appointed and removed, and 
that an arrangement similar to that used in the election 
and removal of directors of a corporation may be em- 
ployed. 

Liability of Trustees. — The nature of trusteeship places 
upon the trustees a two-sided liability, namely, toward the 
creditors of the trust and toward the beneficiaries. 

Toward the creditors the trustee's liability, in the case 
of the simple or dry trust, is unlimited. Where there is 
but one trustee, his liability is identical to that of an in- 
dividual proprietor, and where there are several, they are 
treated in this matter like ordinary partners. The credi- 
tors look to the trustee personally to satisfy their claims, 
but the latter may reimburse himself out of the trust estate 
for all legitimate losses. If the trust estate is insufficient to 



218 SECURITIES-ISSUING ORGANIZATIONS 

repay him fully for the sums paid to creditors, the balance 
remains as a personal loss, for it cannot be passed on to 
the beneficiaries. It is customary for trustees of dry trusts 
to stipulate in all business contracts entered into on behalf 
of the trust, that the trust estate alone shall be bound as 
pledge for the debt, and in this way to relieve themselves 
somewhat from the onerous burden of unlimited liability. 

The rule concerning trustees' liability in active trusts 
follows that described as applicable to a dry trust in all 
cases where the trust agreement, or deed, does not defi- 
nitely and specifically limit it. Where the trust is em- 
barked in business, the liability of the trustee is frequently 
limited by the deed of trust, so that the trust estate only 
is bound for any debts incurred on behalf of the trust. 
When this is done the trustee is usually required to show 
how much of the trust property is encumbered, and what 
portion is free. Then, by inserting in all contracts that the 
trust estate alone is to be looked to for satisfaction of 
creditors, he cannot himself be personally liable, except 
in case of fraudulent concealment of the true 'condition of 
the estate. 

The trustee's liability toward the beneficiaries arises out 
of the circumstance that he is in a fiduciary relation to 
them. For in spite of the fact that the legal title to the 
trust property is vested in him, he is, nevertheless, still 
liable to the beneficiaries for any losses suffered by the 
trust estate as a result of his culpable negligence or fraudu- 
lent action, because such acts may directly damage the 
beneficiaries by reducing the benefits to which they hold 
the equitable title. Thus, where the trust estate has suf- 
fered loss under these conditions, the trustee is personally 
liable and will be required by a court of equity to reim- 
burse the estate. 

Where there are several trustees all are held to be jointly 
liable for the valid acts of any one of their number. This 



THE BUSINESS TRUST 219 

is on the theory that there is no such thing as an inactive 
trustee. Consequently, it makes little difference whether 
or not all had knowledge of and gave assent to the bind- 
ing acts, they are nevertheless liable. The same rule has 
been held to apply with equal force where fraudulent or 
culpable acts had been committed by one trustee to whom 
the others had left the direction and management of the 
trust's affairs. The trustees may, however, protect them- 
selves by active participation in the trusteeship and through 
voicing a negative vote in such matters. 

Right to Sue and be Sued. — An action at law by or 
against a trust embarked in business ordinarily must be 
brought by or against the trustees. The beneficiaries 
usually need not be brought into the action, where a per- 
sonal judgment is sought against a trustee or by him on 
behalf of the trust, although in a few states by a limited 
number of cases, it has been held that the beneficiaries 
should be joined with the trustees in the suit. This con- 
tention is strengthened where the very existence of the 
trust is at stake. It should be noted, however, that, in a 
business trust where the beneficiaries gain their status by 
virtue of ownership of transferable shares, there are serious 
practical difficulties standing in the way of joining them in 
actions. The rule in these cases seems to favor omitting 
them. 

The judicial jurisdiction in which suit may be brought 
is also of importance at this point. In statutory trusts, or 
such as are created by court appointments, it is held that 
action must be brought within the jurisdiction of the super- 
vising court. In the case of contractual trusts, such as 
business trusts are, the trustee if he is a citizen may sue 
and be sued as any other citizen in whatever court's juris- 
diction he may happen to be. 

The general character of the liability assumed by the 
trustee is such that he can easily protect himself against 



220 SECURITIES-ISSUING ORGANIZATIONS 

loss arising from liability for any lawful act on his part. 
Every form of insurance is open to him, and he is a stupid 
trustee who does not protect himself by taking out fire, 
cyclone, indemnity, fidelity, and like types of insurance. 
For culpable and fraudulent acts there is, of course, no 
protection ; the law will take its course and fix liability upon 
him for such acts. 

Relation to Court of Equity. — A trust estate is con- 
stantly under the supervision of a court of equity with 
which the final power of direction rests. While the trustee 
may do any lawful act generally authorized by the trust 
agreement, this rule is not construed to restrict his sphere 
of action to such things as he may have been specifically 
authorized to do. If an act not specifically authorized but 
necessary to preserve or make the trust effective, is con- 
templated by the trustee he may apply to the court of 
equity for direction. This, when given, constitutes full 
authority, regardless of what may be its results. But of 
course, this does not mean that the trustee may appeal to 
the court to decide every point that may come up. It 
must be a matter of some importance. 

Compensation of Trustees. — The trustee is entitled to 
receive any compensation that may be agreed upon in the 
trust deed. But where no agreement concerning compensa- 
tion has been made it is held, according to the American 
rule, that the trustee shall be entitled to a reasonable 
compensation for his services. The court may also set 
the amount at a sum that will make it possible to secure 
some person to act as trustee who is qualified to fill that 
position and to give effectiveness to the trust. 

The Beneficiaries 

The beneficiaries are the entrepreneurs of the trust 
estate. They are said to have the equitable title while 
the legal title to the property is vested in the trustee. 



THE BUSINESS TRUST 221 

Their status is very like that of partners without any lia- 
bility or power of management and direction. Their 
entrepreneurial function is something less than even that 
of the dormant partner. In fact, the sole entrepreneurial 
elements to be found in their status are a standing claim 
to that part of the income of the trust not otherwise 
claimed by creditors and sometimes, though not always, a 
deferred claim to share in the distribution of assets upon 
dissolution of the trust after preferred claimants have been 
satisfied. Since their claims are last claims, they have 
assumed at least a large share of the element of risk, which, 
coupled with the power to appoint and remove trustees 
and to terminate the trust, frequently given them in the 
trust deed, would seem to entitle them to be considered as 
entrepreneurs. 

In the business trust, the interests of the beneficiaries 
are usually embodied in securities, called trust certificates. 
This feature, combined with the rights and powers ordinarily 
given to the beneficiaries by the trust agreement, places them 
in a position with relation to the trust which is very similar 
to that of the stockholders to the corporation. 

Rights and Powers of Beneficiaries. — The rights and 
powers of the beneficiaries are fairly well defined under 
common law practice as interpreted by court decisions. 
Within these absolute limits they may be modified by pro- 
visions inserted into the deed of trust by virtue of which 
the beneficiaries gain that status. They will be considered 
here only in so far as they apply to trusts created to carry 
on a business. 

1. Each beneficiary has the right to demand and receive 
his proportionate share of the benefits or profits accruing 
to the trust estate as provided in the deed of trust. He 
can dispose of his share as he pleases after once having re- 
ceived it. There are also cases on record which seem to 
sanction his right to anticipate his income from the trust 



222 SECURITIES-ISSUING ORGANIZATIONS 

and to pledge it; but usually this cannot be done irrev- 
ocably. Where all of the beneficiaries agree that the ac- 
crued profits shall be reinvested they may thus add to 
the trust capital. As a general rule, the beneficiary takes 
the full legal title to the accrued income at the moment that 
it should be paid over to him, because beyond that time 
there would be a wrongful withholding by the trustee. 

2. He has also the right to demand reimbursement to the 
trust estate for any losses thereto arising out of fraudulent, 
culpable or wrongful acts of any trustee. Thus, if any 
loss is sustained by the trust estate by any wrongful or 
unlawful act of a trustee, such trustee may be sued in a 
court of equity and judgment secured by the beneficiary 
requiring the culpable trustee to restore the trust estate. 

3. He has the right at all times to be informed concern- 
ing the management and the condition of the trust. He may 
demand of the trustees a complete statement of the ac- 
counts and finances of the business at all reasonable times. 
This right is usually set forth in the trust agreement by 
requiring the trustees to render periodic statements and 
reports on the condition of the trust and to transmit copies 
to each of the beneficiaries. 

4. He has the right to claim non-liability for any acts 
of the trustees. The creditors cannot look to him for the 
satisfaction of any claims not fully met out of the trust 
estate. 

5. He has the right to appeal to a court of equity to 
have an incompetent trustee removed. In such an action 
he may act without joining in with the other beneficiaries. 
Removal of a trustee through such action will be ordered 
by the court only where the beneficiary presents evidence 
showing the existence of sufficient cause. 

6. The beneficiaries as a body may reserve to themselves 
the right to elect successors of trustees and to remove 
trustees for cause where it is so provided in the trust agree- 



THE BUSINESS TRUST 223 

ment. In such cases the method of voting to be employed 
is prescribed in the agreement. Where the beneficiary's 
interest is represented by transferable trust shares, or 
certificates, he usually has one vote for each share owned. 

7. In the ordinary type of business trust, wherein the 
interest of the beneficiary is represented by transferable 
shares, it is common to insert in the trust agreement that 
the trust may be terminated at any time through the ac- 
quiescence of a specified majority of shareholders. How- 
ever, where such provision is not incorporated in the trust 
deed, the beneficiaries would not possess power to terminate 
the trust. 

Liability of Beneficiaries. — The liability of loss, or 
business risk, assumed by the beneficiary of a business 
trust has an absolute limit. He may lose only what he 
has contributed to the trust estate either as an original 
settlement, or as subsequent additions to the trust estate 
through new contributions or conversion of profits. Of 
course, where he is not himself a settlor, but simply a 
gratuitous beneficiary, he assumes no risk of loss of any 
capital that he may have had at the time of the creation 
of the trust. The right of creditors to satisfy their claims 
out of the trust estate and the personal estate of the trustee 
does not usually involve the beneficiary. His liability is 
even less than that of the stockholder in a corporation, who, 
if he pays less than the par value of stock, may be called 
upon by creditors in case of insolvency to make up the 
difference between what he has actually paid and the par 
value of the shares that he subscribed to. In the business 
trust, on the other hand, he risks only what the trustee 
has actually received from him, and not what he may have 
agreed to contribute. 

Transferability of Beneficial Interest. — The beneficiary 
of the business trust generally has the same privilege of 
divesting himself of his equitable interest in the trust estate 



224 SECURITIES-ISSUING ORGANIZATIONS 

as has a stockholder in a corporation to sell or give away 
his interest in the corporation. But this privilege may be 
limited by a trust agreement or deed to be exercisable only 
after the beneficiary has received his profits, and so may 
not allow him to divest himself of the title to the benefits. 
An arrangement such as the latter would obviously inter- 
fere with the freedom with which he may deal with his 
equitable business property. However, this is a rare excep- 
tion to the general rule. 

The usual medium employed to make the beneficial 
interest in a trust freely transferable are securities. 
These securities, called trust shares or certificates, carry 
with them a standing claim on the net income of the trust 
and a deferred claim on the assets of the trust estate. 
They ordinarily have no face or par value, and resemble 
very closely non-par value stock. The assignment of a 
nominal par value to them is not prohibited, but as it is 
practically meaningless, it can serve no purpose other 
than that of being a convenient basis upon which to dis- 
tribute the earnings. Special preferences may be repre- 
sented by preferred shares, similar to those of the 
corporation. In fact, all of the niceties of participation 
adjustments to be found in corporate securities may be 
freely employed in the trust. 

The Trust Capital 

The original capital of a trust embarked in " business 
consists of the property, real and personal, that the settlors 
actually conveyed to the trustee. The divestment by the 
settlors of the legal title to the property must be absolute 
so long as the trust is to last. They may in no way retain 
control over it while it remains a trust estate. The trustee, 
as before stated, has the legal title to this capital and the 
absolute control of it. Thus he may deal with it in what- 



THE BUSINESS TRUST 225 

ever manner he believes will best accomplish the purpose 
for which the trust was created, being limited in this only 
by such specific stipulations as may be found in the deed 
of trust. 

It is not necessary that the capital be preserved in the 
form in which it originally was when the trustee received 
it. In a trading trust created to derive a profit from the 
purchase and sale of commodities this is self-evident. The 
New England real estate trusts are also usually empowered 
to buy, hold and sell parcels of real estate. In fact, it is 
not uncommon to authorize trustees of business trusts to 
convert the properties into cash for reinvestment in 'other 
enterprises. Hence, capital devoted to business under- 
takings under the trust form of ownership organization 
need be no less fluid than under any other type of or- 
ganization. 

The trust capital is not capitalized in the same sense as 
that of the corporation. In the latter type of organization, 
as we have seen, the capitalization is measured by the sum 
total of outstanding securities, where these have an as- 
cribed par value, end if the assets do not equal this in value 
the items in the balance sheet must in some way be inflated 
to bring about a balance. However, in the trust, the capi- 
talization would conform more closely to a figure arrived 
at by capitalizing the net income or earning capacity, as 
no authorized capital need be taken into account. Even 
where a par value is ascribed to the trust securities, this 
is a meaningless fiction; for the creditors as well as the 
beneficiaries may demand of the trustee a statement show- 
ing the actual condition of the trust estate. Any error 
in such a statement arising from intent or undue negligence 
on the part of the latter renders him personally liable for 
losses sustained by others acting in full faith upon its 
correctness. The trust estate, where such power is given 
in the deed of trust, may be pledged as security for issues 



226 SECURITIES-ISSUING ORGANIZATIONS 

of bonds of both the mortgage and debenture types almost 
as freely as in the case of corporations, with similar rights 
to the bondholders. 

Rights of Creditors 

The creditors of a trust have no direct rights enforceable 
against the beneficiaries although they may acquire title 
to the latter's equitable right to the benefits. However, 
this, as well as their other rights, are more directly against 
the trustee and the trust estate. These rigfits are greatest 
in the simple or dry trust. They may be summarized as 
follows: (1) They have the right to seek satisfaction out 
of the personal estate of the trustee which, of course, legally 
includes the trust property, and they may sue the trustee 
in person to recover, leaving it to the latter to reimburse 
himself out of the trust estate. (2) Unless otherwise pro- 
vided, a creditor also has the right to demand proof that 
the property sold to the trustee has actually been applied 
by the latter to the purposes of the trust. (3) In case of 
insolvency of the trust the creditors may take the place of 
the beneficiaries or share with them in the benefits of the 
trust while the property remains in the hands of the 
trustee, who thus becomes trustee for the creditors. (4) 
They may appeal to the court of equity that has jurisdic- 
tion over the trust to have the assets liquidated and the 
proceeds turned over to them; in which case they all share 
ratably, since no preference may be granted. 

The general rights of creditors as above outlined are 
broadest in the simple or dry trust, but most of them may 
be considerably narrowed by provisions inserted into the' 
trust deed. This practice is commonly followed in agree- 
ments creating business trusts. For instance, the first right 
mentioned is usually so limited that the trustee pledges only 
the trust property to support creditors' claims; the second 
may be entirely eliminated ; but the others ordinarily hold. 



THE BUSINESS TRUST 227 



Other Trust Features 

Duration. — It is a cardinal principle of common law 
that no property shall permanently be withdrawn from 
commerce. It is called the rule against perpetuities, and 
is interpreted by courts to mean that no person may, ex- 
cept by express authority of statute, suspend his power of 
alienation over his property. The application of this prin- 
ciple to trusts has been clearly stated by a New York court 
which said: "The mere creation of a trust does not, ipso 
facto, suspend the power of alienation. It is only sus- 
pended by such a trust, where a trust term is created, 
either expressly or by implication, during the existence of 
which a sale by the trustee would be in contravention of 
the trust.'^ ^ But this is further modified in that " It is 
only in cases where other parties besides the person creat- 
ing the trust have an interest therein that the trust be- 
comes irrevocable." ^ 

This rule has a direct bearing upon the duration or term 
of years for which a trust may be created without vesting 
the power of alienation in the trustee. Such limitations are 
fixed by statute in many of the states, but vary con- 
siderably. Thus, in some jurisdictions, the term of lawful 
suspension is measured by a life or lives in being, in others 
by twenty or twenty-one years, and in still others by the 
two combined. However, it should be pointed out that 
there is no suspension of alienation where the settlors are 
the sole beneficiaries, and also where the trustee is given 
the power to sell the trust property with direction to re- 
invest it. Hence, in the first case, the life term of the 
trust would be limited, while in the latter it may continue 
indefinitely. 

1 Roberts v. Corning (1882), 89 N. Y. 225. 

2 John H. Sears, Trusts as Business Companies, p. 131. 



228 SECURITIES-ISSUING ORGANIZATIONS 

Scope of Activity. — The business trust is a common 
law organization constituted by contractual agreement. 
Consequently it is not restricted in the scope of its ac- 
tivities, except where it may be against public policy or 
statutes. It may be employed to conduct any kind of 
business enterprise and may change from one enterprise 
to another where provision for this is made in the agree- 
ment instituting it. In this respect, therefore, it resembles 
the personal ownership types such as the partnership, as 
well as the corporation; for, where the settlors are the 
sole beneficiaries, the deed may be changed by agreement, 
but where others than settlors have secured rights under 
it, the terms of the deed bind. 

Taxation. — It is a generally established principle of 
law that the legal and equitable interest in the trust shall 
not both be taxed. Taxes must be levied against either 
the one or the other. In most of the states the statutes 
provide that the tax against the trust property shall be 
levied against the trustee. Where there are several trustees 
residing in different jurisdictions the usually accepted rule 
is that the real property shall be taxed in the jurisdiction in 
which it is located and the personal property in the juris- 
dictions in which the trustees reside. In order to avoid 
double taxation of personalty under this rule, the tax is 
ordinarily pro-rated among trustees residing in different 
tax jurisdictions. Thus, it is seen that the beneficiaries and 
the trustees may not both be taxed, a principle that gives 
the trust quite an advantage over the corporation. The 
latter is itself taxed on its franchise as well as on its 
property and income, and its stockholder is also taxed on 
his stock. 

Dissolution. — The trust may ordinarily be dissolved 
by accomplishment of its purpose, by expiration of its 
term, by volition and by decree of the court of equity. The 
first two of these causes need no further explanation. 



THE BUSINESS TRUST 229 

Voluntary dissolution of a trust can be effected only by 
agreement of the parties thereto or as provided in the 
agreement creating it. Where the settlors are the sole 
beneficiaries they are empowered to dissolve it at will; 
but where third parties have secured rights by virtue of 
it, their consent would be necessary. Where the purpose 
of the trust is injurious to the public welfare, the court 
may cause its dissolution by so decreeing. Bankruptcy is 
not a cause for dissolution. A trust of itself cannot become 
a bankrupt. The usual procedure in case of insolvency is 
for the creditors to become beneficiaries and as such to 
petition the court to dissolve the trust and to apportion its 
assets among them. 

Business Uses and Types 

The trust is without doubt the most versatile of all types 
of ownership organization in business. In it may be com- 
bined all of the best features of the personal ownership 
and the securities-issuing forms. Thus, persons engaged 
in business under a trust have the advantage of the mini- 
mum of restriction to be found under common law to the 
same degree as partners; they have the limited liability 
of stockholders in a corporation, and their enterprise may 
have the same flexibility as the corporation through the 
use of securities to represent the claims on income and 
assets. Hence, in its most highly developed form the busi- 
ness trust is essentially a securities-issuing type of organi- 
zation. As such it is adaptable to business undertakings 
of the largest kind as is well illustrated by the famous 
Standard Oil and American Sugar Trusts, declared to have 
been illegal by the courts, and the somewhat less famous 
but legal trusts of Massachusetts. 

The Trust Agreement. — What the trust agreement of a 
securities-issuing trust embarked in business should contain 
will depend largely upon the result sought to be accom- 



230 SECURITIES-ISSUING ORGANIZATIONS 

plished and the few statutory limitations that are found in 
the several states. There are, however, some general rules 
of law that should be observed. An admirable set of 
directions covering these essential rules has been drafted 
by Mr. John H. Sears,^ and is given below. 

" 1. The trust instrument should fix the term of dura- 
tion of the trust, or its earlier cessation by prescribed ac- 
tion, as say by a vote of two-thirds of its certificate 
holders. The limit within which this term may continue 
and its form of expression are referable to local law, as 
explained. 

" 2. The particular business to be conducted should be 
stated with enough of precision to notify those who deal 
with trustees as to the extent of their powers. 

" 3. The instrument, to resolve all doubt as to its crea- 
tion of a trust, should, along with the vesting of legal title, 
commit to the trustees the absolute control of the trust 
property, with full power to make it answerable for their 
acts and contracts in the conduct of the business of the 
trust. Any power of removal or change of trustees should 
exclude any right to invalidate prior contracts, or repudiate 
responsibility for prior acts, within the apparent scope of 
their powers. 

'' 4. The particular property of which the trust estate is 
to consist, in its original form or as afterwards to be in- 
vested, should be described so as to admit of ready identi- 
fication and by apt words the legal title should be vested 
in the trustees and their successors. 

" 5. The right of trustees to act singly or by a majority 
or collectively, either generally or specially, should be set 
forth, and whether or when their contracts should be in 
writing, or, if oral, what ratification, if any, of a single 
trustee's acts should be required as a condition precedent 
to their validity. Also a collective name may seem to be 

3 Ibid. pp. 249-251. 



THE BUSINESS TRUST 231 

of advantage to a trust. If so, the trust instrument should 
adopt the name, with such signing and counter-signing as 
it may seem advisable to prescribe. 

"6. The trust instrument should vest specifically in the 
trustees the right to stipulate for personal exemption from 
liability in making of contracts, the right to indemnity out 
of the trust where they may be held personally liable, and 
the right to pledge the trust property for their contracts, 
and it should contain a clause for exemption of certificate- 
holders from personal liability. It should be provided that 
all written contracts should contain these features, so as 
to bring them to the notice of parties contracting with the 
trustees. 

'' 7. The instrument should provide how many shares, 
and the different kind of shares, if any, in a trust are to be 
issued, their transfer and how evidenced, that they are per- 
sonal property to pass by succession as other personal 
property and that the death of a holder shall not affect in 
any way the continuance of the trust, nor such death give 
to any person any right for an accounting or partition. 

'^ 8. Provision for meetings of shareholders, regular or 
special, election, removal or change of trustees, filling 
vacancies, investigation into the affairs of the trust and 
reports to shareholders, and for amendments of the trust 
instrument. What right of inquiry a certificate holder 
should have, of his independent motion, might be thought 
advisable to be stated, as well as under what circumstances 
it may be exercised. It is suggested that, if there is a fair 
reason for independent inquiry by a certificate holder, this 
could be made plain to a reasonable number of share- 
holders, who could join in a request and this right thus 
not become liable to abuse, as has been alleged in regard 
to the exercise of such right by a stockholder in a corpora- 
tion. The place of a business should be stated. 

" 9. Care is to be taken that in change of trustees the 



232 SECURITIES-ISSUING ORGANIZATIONS 

trust instrument specifically should provide that their suc- 
cessors succeed to the same rights and powers and are 
subject to the same duties and liabilities and have like 
compensations as the former trustees. 

"10. All instruments of trust should merely by way of 
caution, make specific provision that in no instance need 
anyone dealing with the trustees have any obligation, either 
in law or equity, resting upon him to look after the appli- 
cation of any trust funds or property coming into the hands 
of the trustees. This caution is in view of an old doctrine, 
about purchasers from trustees seeing to the application of 
purchase money to purposes of the trust. Such a provision 
takes away all question as to intent of settlors in this 
regard." 

Types. — Three types of business trusts have come into 
more or less general use. These are (1) operating trusts, 
(2) holding or combination trusts and (3) investment 
trusts. The distinction between them is largely found in 
the purpose for which the trust is organized. 

Operating trusts are organized to carry on a business 
directly through the operation of a business plant and 
equipment by the trustees and their duly appointed agents. 
This type is well represented by " The Massachusetts Gas 
Companies " a trust organized by New York and Boston 
bankers to carry on the business of supplying coal, gas and 
their by-products, etc., to Boston and other New England 
cities. A copy of this trust agreement, which deserves care- 
ful study, may be found in Part VI of this volume. Promi- 
nence has also been given to it by the so-called " Real 
Estate Trusts " which are common in New England. Their 
purpose, in general, is to buy, hold, improve and sell real 
estate, a business which cannot, because of statutory 
prohibition, be carried on by corporations. In the city of 
Boston, alone, these real estate trusts own property whose 
value is considerably more than $300,000,000. The tax 



THE BUSINESS TRUST 233 

commissioner of the Commonwealth of Massachusetts in 
his report to the legislature in 1911 commenting upon the 
serviceability of trusts of this type, says: "The right of 
shareholders, the terms of office of trustees, their compensa- 
tion, powers, duties, and limitations are more satisfactorily 
regulated by the terms of the trust agreement, which can 
be drawn to meet the special needs in eacK case, than 
could be possible under the general corporation laws."* 

The holding trust is an outgrowth of the voting trust so 
frequently employed by stockholders of a corporation to 
conserve some special interest by combining their voting 
power. It is at once clear, where the majority of the 
voting stock of several corporations is placed in the hands 
of the same trustees as a single trust estate, that the 
trustees would thereby become empowered to control the 
corporations whose stock they thus hold by electing direc- 
tors who will carry out their wishes, or by electing them- 
selves to those positions. The capital of such a trust con- 
sists chiefly of securities which are constituted a trust fund 
not for the purpose of conducting or operating any par- 
ticular business enterprise, but to serve merely as a con- 
venient form of organization to control the activities of 
operating units that were already established or were subse- 
quently to be established. They are, pure combination 
organizations seeking to harmonize and unify the business 
policies of the units that they control. Where the controlled 
units are corporations, it has been held by the courts, that 
such holding trusts are illegal because corporations may 
combine only as permitted by statute, and in such in- 
stances committed an act ultra vires by themselves becom- 
ing parties to the agreement.^ In a subsequent case where 
the corporations themselves were not parties to the agree- 
ment the court, nevertheless, held that the separate entity of 

* Mass. Acts and Resolves, 1911, ch. 55. 

6 State V. Standard Oil Co., 49 Ohio St. 137 (1892), and others. 



234 SECURITIES-ISSUING ORGANIZATIONS 

the corporations had been disregarded and the agreement 
was illegal.^ But when statutory authority is granted, hold- 
ing trusts that control corporations are quite legal, as is 
also the case if the controlled organizations are of the non- 
corporate type/ 

The investment trust is like the holding trust in that the 
trust fund consists chiefly of securities, but it differs from 
the latter in its methods and purposes. While the purpose 
of the holding trust is control over other organizations, that 
of the investment trust is to reduce to a minimum the risk 
of loss arising out of ownership of securities. The method 
followed in constituting such trusts consists essentially of 
creating a trust fund on shares and utilizing this to pur- 
chase securities of a large number of enterprises so that 
the beneficiaries, or shareholders, will receive an average 
profit rather than to run the risk of fluctuations in divi- 
dends. In other words, they seek to reduce the unequal 
earnings of many undertakings to a uniform average rate 
and thereby to reduce the small investor's risk. This type 
of organization first came into prominence in England dur- 
ing the decade 1870-1880 when a considerable number of 
these trusts were organized. 

Speculative securities-holding trusts very much like the 
investment trust are also to be found, chiefly in England. 
They differ from the investment trust in that their opera- 
tions consist of trading in securities thereby deriving an 
income from the purchase and sale of securities and not 
primarily from dividends. 

6 U. S. V. Standard Oil Co., of N. J. (1911), 221 U. S. 1, I. C. 41. 

7 For a trust agreement illustrating this type see that of the 
Standard Oil Trust given in Part VI of this volume. 



PART IV 

COMBINATION ORGANIZATIONS 



CHAPTER XIII 
BUSINESS COMBINATION: ITS CAUSES AND FORMS 

The phenomenon of combination of entrepreneurial 
units, even to a point little short of complete monopoly, 
is perhaps the most characteristic feature of modern in- 
dustrial organization. This movement, which became im- 
portant about the middle of the last century, has been 
experienced in all the industrial countries of the world ; but 
it has been most pronounced in the United States, Ger- 
many and Belgium and less so in England, France and 
other European countries. In the United States it is found 
to exist and to flourish in practically all of our basic in- 
dustries, and it is now making its appearance in the field 
of trade, even including retailing. We find it among our 
railroads, ocean transportation companies, public utilities, 
the mining, steel, and petroleum industries, construction, 
manufacture of automobiles, chemicals, powder, tobacco, 
sugar, electrical equipment, etc., as well as in the meat 
packing industry, horticulture, lumbering and fishing. In 
fact, there are but few industries in this country in which 
the phenomenon of combination is absent or where attempts 
to introduce it have resulted in failure, as for example, in 
the manufacture of cotton yarn and textiles, starch, malt, 
rope and twine and in the production of table salt. 

It is this movement toward combination that has in- 
duced Congress to enact the Interstate Commerce Act 
of 1887, and the Sherman Anti-Trust Act of 1890, and 
subsequently to strengthen them with supporting legisla- 
tion. The several states also attacked the movement with 

237 



238 COMBINATION ORGANIZATIONS 

anti-combination, anti-pool and anti-trust laws. But the 
economic forces back of it have been so strong that most 
of the great combinations existing in this country today 
have been formed in the face of these laws, though some 
of them have been held by the courts to be in violation of 
the statutes against monopolies, combinations in restraint 
of trade and conspiracies to raise prices, and were ordered 
to dissolve. 

Causes of Combination and Concentration. — To enter 
into an exhaustive treatise on the forces that make for 
combination and concentration of the business units in 
modern industry is somewhat without the purview of this 
work whose prime purpose it is to describe the present day 
types of ownership organization. However, without a 
brief survey of some of the more important causes lying 
at the bottom of this phenomenon, the picture would be 
lacking in completeness. We may summarize them as fol- 
lows: (1) The economy of large-scale production; (2) the 
advent of periodic maladjustments in the relation of supply 
to demand; (3) the tendency for competition to force 
prices below the cost of production; (4) the immobility 
of economic capital represented by industrial plants, etc.; 
and' (5) the pouring of surplus investable funds into 
saturated industries through the activities of professional 
promoters. 

A perfect balance between the factors of supply and 
demand can scarcely ever exist throughout all fields of 
industry. It has been the world's experience with the 
present industrial system that the demand for goods will 
exceed the supply over a period of years that is character- 
ized as a period of rising prices and that, sooner or later, 
the supply of goods will exceed the demand, ushering in a 
period of declining prices. Thus, a period of true normal 
growth of both demand and supply is indeed a rarity. It 
exists largely as a theoretical concept. The laws of nature 



CAUSES AND FORMS OF COMBINATION 239 

are not subject to human control, and so long as this is the 
case, it is extremely difficult for man to make the supply 
of goods balance his needs. He aggravates the forces be- 
hind this lack of balance still more by the methods of 
production and distribution that he has introduced into 
his economic life. 

The modern technico-mechanical method of production 
is characterized by its large-scale producing units. Minute 
division of labor, accompanied by highly specialized ma- 
chinery, has made the modern industrial enterprise one 
that can produce profitably only by producing in large 
masses of like units. The cost of production per unit is 
lowest when a machine is operated at its maximum rated 
capacity. This, coupled with the fact that each succeeding 
stage in the process of manufacture is dependent upon its 
immediately preceding stage, tends to keep the whole 
system keyed up to a capacity that will approximate the 
maximum for the units worked. However, the system is 
insufficiently elastic to permit of contraction of supply in 
conformity to a slump in demand. Not only is it difficult 
in many industries to make a uniform cut of ten per cent 
in the total finished product, but such a cut involves a 
relative increase in the cost per unit as prices fall because 
of the overhead charges for invested capital. 

This situation is made clear by assuming that a corpora- 
tion operates three small steel mills, located respectively in 
Pittsburg, Chicago and Scranton. Each plant is equipped 
with two blast furnaces which furnish the raw material 
for further manufacture. The demand for the products 
of this concern now falls off uniformly to three quarters of 
the productive capacity of the plants. The company can- 
not operate a blast furnace at less than its rated capacity 
without sustaining an enormous loss, and it continues to 
operate them as before. The same is true of its converters 
and open-hearth furnaces. The individual production 



240 COMBINATION ORGANIZATIONS 

centers of its plants are not so rated in their capacity as 
to make two lines of sequence each performing the same 
processes as the other. One bessemer converter might be 
sufficient to meet its requirements in that direction, while 
three open-hearth furnaces complete the steel making 
equipment. These can just take care of the full product of 
the two blast furnaces. Such a plant is obviously not a 
multiple of like units linked together into two or three 
complete chains of production centers that can produce the 
finished product independently of each other. It is itself 
a single producing unit. Consequently the company will 
continue to operate it at its full capacity, at which point the 
cost of production is lowest, until the continued over- 
supply of steel products has brought prices down so low 
that it will entail less loss to the company to shut down 
completely. To reduce its output, the corporation must 
close one of its plants; for under competitive conditions of 
production, it cannot operate all three at much less than 
capacity without increasing its cost of production to the 
point of destroying its market. 

While most of our great fundamental industries are thus 
confronted with this necessity for capacity production, 
there are others in which the multiple duplication of 
mechanical devices, as for example in the cotton textile 
industry, gives a relatively greater degree of elasticity to 
the rate of production. In others again, such as the shoe 
manufacturing industry, there is no direct capital invest- 
ment for machinery, but merely a fixed charge per pair of 
shoes ; hence, here also the overhead charges do not increase 
greatly with the reduced output. 

In considering the demand side of the equation we must 
bear in mind first of all that the factor of demand itself 
is influenced by numerous other factors, such as the ca- 
pacity for consumption in a given community of a given 
article at a given price, and what influence an over-pro- 



CAUSES AND FORMS OF COMBINATION 241 

duction exerts upon the demand. None of these factors is 
stable, neither does any one progress at a uniform pace. 
Any large, unanticipated increase in a nation's general 
supply of goods must reflect itself in the form of relatively 
lower prices, and tends, thus, to increase the general demand 
for goods. This, however, does not always mean that those 
entrepreneurs whose enterprise has been blessed with the 
unexpected increase in quantity of product will receive a 
greater profit. A bumper grain harvest, or cotton crop, 
may so reduce the price of these commodities as to prevent 
any financial benefit from accruing to the farmers and 
planters who grew it. It may even mean a direct loss to 
them since the cost of producing it may have exceeded 
the price that it will bring on the market. Such, for in- 
stance, was the condition of the growers of these crops, in 
1920, when quantities far in excess of market requirements 
were produced. 

However, such an excess harvest, because it does result 
in a general lowering of prices in these goods, tends to 
cause a general speeding up of industries that use them as 
raw material. It tends to lower the cost of living, to bring 
down wages and to widen markets. Railroads must be 
equipped to handle the crops, mills to grind the wheat into 
flour, and others to work up the cotton into consumable 
goods. All take on greater activity. In this way the 
whole industrial organization tends to increase its pro- 
ductive capacity, while new establishments spring up to 
share in the increased prosperity. 

It is at once clear that a series of large harvests, or an 
excessive demand for goods arising from war or other 
causes, raises the productive capacity of industry above the 
normal requirements and draws new competitors into fields 
that under normal conditions might be considered to be al- 
ready fully equipped to meet normal demands. Capital is 
constantly being attracted to industries in which a profit 



242 COMBINATION ORGANIZATIONS 

somewhat above the normal may be obtained. This process 
continues until the balance between supply and the in- 
flated demand is restored. But sooner or later will come a 
time when the supply exceeds the requirements of the com- 
munity. It may be brought about gradually through a 
falling off in the rate of increase of population or through 
a gradual depletion of the soil, or suddenly by a series of 
crop failures, the erection of tariff walls cutting off outside 
markets, or the like. Industry then comes suddenly to 
the realization that it is producing goods that it cannot 
sell, or that it can sell only at a price that is below the 
cost of production. 

It is at this point that the industry in question is faced 
with the problem of readjusting the factors of supply and 
demand. It must reduce its rate of production or in- 
crease the demand for the product. The latter is or- 
dinarily a slow process that may . take a long period 
of time, and besides it is one over which the industry 
has little control. Nevertheless, a price reduction 
would enable the industry to make the existing 
market as effective as possible. A reduction in price neces- 
sitates a reduction in costs. Wages are attacked first, then 
cost of materials and so on. Those concerns that cannot 
make these reductions will sooner or later close their plants. 
Some may be forced into insolvency. But they all remain 
as potential competitors, because capital once sunk into 
a specialized plant and equipment cannot again be re- 
covered. Even the insolvent ones retain their potential 
productive capacity for they are seldom abandoned. They 
merely undergo a financial reorganization, a change in the 
form of outstanding securities, and perhaps a change of 
ownership. They wait only for the demand to pick up 
when they again enter the field as active competitors, with 
perhaps a slight advantage over others arising from re- 
duced overhead costs, for their interest requirements may 



CAUSES AND FORMS OF COMBINATION 243 

have been reduced through reorganization. Then as de- 
mand begins again to revive, production is soon at its 
maximum capacity, while new capital is drawn in until 
competition is more severe than before. 

But such lessons do not always go unlearned. Here and 
there, may arise a far-sighted man who, through his com- 
manding position in the industry, may bring the warring 
factions together for the mutual benefit of all concerned. 
An agreement on prices, production or markets may be 
entered into, or an association for regulation of competi- 
tion may be formed, or the competing factions may be 
bound together through ownership ties. This process may 
continue to the point of monopoly of the industry or it may 
simply result in reducing the number of establishments to 
a point where but a few large combinations are in a posi- 
tion to compete in an over-saturated market. 

However, it is not always the legitimate entrepreneur 
who is at the bottom of the combination movement. The 
country is full of professional promoters, who, with their 
eyes fixed upon the vast sums of investable funds in banks, 
insurance companies, trust companies and other financial 
institutions, fall upon the happy idea that a combination 
can be formed. The question of economic need or ex- 
pediency does not concern them. They make their profit 
by organizing the new enterprise, not by operating it. It 
is not a difficult matter for them to obtain the necessarj^ 
finances, for the so-called " private banks " and trust 
companies are ever ready to enter into underwriting syn- 
dicates to finance the new enterprise. They, like the pro- 
moter, step in, not as entrepreneurs of the undertaking, but 
as merchants who sell it money capital in return for its 
securities, which they then try to sell at a profit to specu- 
lators and investors. Whether the economic conditions 
warrant the new enterprise and what happens to it after- 
wards does not greatly concern those that have brought 
it into being. 



2U COMBINATION ORGANIZATIONS 

It is thus seen that there are times during which economic 
conditions are such as to usher in a period of combination 
that extends generally throughout the whole industrial 
fabric, and that these periods are separated by years of 
conmiercial and industrial stagnation during which the 
forces making for combination lie more or less dormant. 
This is not only true of industry in the United States, 
but also in all of the great industrial countries of the world. 
But before entering into a discussion of these periods, it 
will be necessary to explain the direction in which combina- 
tion may take place. 

Direction in Which Combination May Take Place. — 
Let us assmne that each entrepreneurial unit in the steel 
industry confines its activities entirely to the performance 
of a single step in the process of manufacture necessary to 
produce a marketable product that serves as raw material 
for the units performing the next higher step. We may 
then sort them out into groups composed of like units and 
arrange them into horizontal rows. These rows may next 
be arranged according to the sequence of the stages of 
manufacture necessary to produce the finished product. 
By this means, as indicated in the diagram on opposite page, 
we obtain horizontal rows of like units, and vertical columns 
of unlike units, that are capable of performing all the steps 
necessary to produce the finished product. 

If now, as a result of economic conditions, it becomes 
necessary or desirable to combine the units, we may do so 
in either of two directions, namely, we may combine the 
like units in the horizontal rows, or the unlike units of the 
vertical columns. The former is usually known as hori- 
zontal combination and the latter as vertical combination 
or integration. 

Horizontal combination aims usually at a control over the 
product from the standpoint of market conditions pre- 
vailing in the industry that it embraces. Such combines 



CAUSES AND FORMS OF COMBINATION 245 

seek ordinarily to control the selling price of the product, 
to regulate the production in order to prevent an over- 
supply, to apportion the demand among the units by as- 
signing to each a certain geographical territory or a given 
per cent of the total estimated production for the year, or to 
obtain a complete monopoly over the product. Since it 
depends to a much greater degree upon control over mar- 



HORIZONTAL OR TRADE COMBINATION 



^<\ TIN PLATE CO. 



WIRE MILL CO. 



ROLLING MILL CO. 



STEEL INGOT CO. 



PIG IRON PRODUCER 



IRON MINING CO. 



LIMESTONE CO. 



COKE COMPANY 



COAL MINING CO. 



TIN PLATE CO. 



WIRE MILL CO. 



ROLLING MILL CO. 



STEEL INGOT CO. 



PIG IRON PRODUCER 



IRON MINING CO. 



LIMESTONE CO. 



COKE COMPANY 



COAL MINING CO. 



TIN PLATE CO. 



WIRE MILL CO. 



ROLLING MILL CO. 



STEEL INGOT CO. 



PIG IRON PRODUCER 



IRON MINING CO. 



LIMESTONE CO. 



COKE COMPANY 



COAL MINING CO. 



keting, than over production for its effectiveness, it is 
frequently called trade comhination. 

In the United States, this form of combination began to 
gain prominence shortly after the close of the Civil War. 
From that time on it continued more or less unhampered 
until the passage of the Interstate Commerce Commission 
Act, of 1889, and the Sherman Anti-Trust Act, of 1890. 
Since the passage of these acts it has proceeded at a some- 
what lessened pace, but with equally important effect. It 
manifests itself in several ways, such as the building up 
of large-scale business units followed by a binding to- 



246 COMBINATION ORGANIZATIONS 

gether of these units through agreements into associations, 
federations, and holding company organizations. Thus, 
the census statistics show that in 1860 there were some 
2500 business establishments engaged in the manufacture 
of agricultural implements and by 1910 there remained but 
640 whose total output was valued at over $94,000,000 ; but 
34 of the 640 each valued their annual product at over 
$1,000,000 and these accounted for 64.3 per cent of the 
total product. Establishments engaged in the tanning, 
curing and finishing of leather numbered about 7600 in 
1870, but by 1910 only 919 are reported, but 78 of these 
accounted for nearly one half of the total product valued 
at over $150,000,000. The same condition exists in the 
case of carpet mills, tobacco manufacturing establishments, 
smelting and refining of copper and lead, worsted, woolen 
and felt mills and many other industries. This process may 
take place very rapidl}^, as illustrated in the case of the 
Diamond Match Company which, in 1880, is reported to 
have bought up some 75 match factories which it there- 
upon combined into 37, and in 1900 it had reduced these to 
16 in number. 

There are, however, a few industries that are conspicuous 
for their resistance against this method of combination. 
Among these are the cotton textile and the boot and shoe 
industries. The former is not a fit subject for this type 
of combination because of the relatively greater degree 
of elasticity in the adjustment of output to demand and 
the great range of products that a single mill is capable of 
producing. In the shoe industry, combination has been 
confined largely to a monopoly through control of patents 
covering the important machines used in making shoes, 
rather than of the makers of the finished product. These 
patents are held by the United Shoe Machinery Company 
which leases the machines to shoe factories. 

In their looser form or embryonic stage, these combina- 



CAUSES AND FORMS OF COMBINATION 247 

tions manifest themselves as associations based on agree- 
ments between the units usually seeking to control prices, 
accompanied at times with apportionment of the market, 
pooling of profits and limiting production. Thus, we find 
in 1901 the American Publishers Association, whose mem- 
bers published about 90 per cent of American books, co- 
operating with the equally extensive American Booksellers' 
Association in an attempt to control the resale price of 
copyrighted books; and later in the drug trade, national 
organizations of manufacturers, of wholesalers and of re- 
tailers cooperating with one another for the same pur- 
pose. We find them in the wall paper industry, the lumber 
industry, oil cloth, powder, tobacco and a great many 
others. But such associations have almost invariably run 
counter to the federal and state laws against combinations 
in restraint of trade. For this and other reasons, there has 
been a tendency to form horizontal combinations by making 
use of the holding company. 

Some of the largest of our horizontal, holding-company 
combinations were formed during the great combination or 
" trust " period, 1897 to 1902. Among these may be men- 
tioned the telephone combination effected through the 
American Telephone and Telegraph Company in 1900, that 
now owns or controls about 70 per cent of all the telephone 
stations in the country, which in 1919 numbered over 12 
million. The famous Northern Securities Company, 
through which the control over the Great Northern Railway 
Company, the Northern Pacific Railway Company and the 
Chicago Burlington and Quincy Railroad Company was 
unified, was formed in 1901. The International Mercantile 
Marine Company, combining some eight or nine great 
trans-Atlantic steamship lines, also was formed at about 
this time. Since 1910, the same phenomenon has made its 
appearance among trading establishments. In the drug 
business we now find the American Druggists' Syndicate 




248 COMBINATION ORGANIZATIONS 

and the United Drug Company, which, however, are to 
some extent integrations. Similarly, we have the United 
Retail Stores Corporation organized in 1919, the Associated 
Dry Goods Corporation, 1916, and tihe Mercantile Stores 
Company, Inc., 1919, together with a host of others, the 
ist of which is growing rapidly. 

Vertical combination, or integration, seeks to gain a 
market advantage by establishing a control or ownership 
interest over the establishments that perform the greater 
part of the stages of production preceding and succeeding 
the one that forms the chief operation of the key unit. 
Thus, the pig iron producer in the diagram may extend his 
operations forward in the direction of the finished product 
or may reach backward producing his own raw materials. 
When the process has been carried to completion the com- 
bination is no longer dependent upon independent producers 
of raw materials and half-finished products, and it will 
also have reduced the effect that fluctuating markets will 
have upon it, for it need not worry about market conditions 
for steel ingots or rolling mill products as such. It, of 
course, also tends to reduce its costs of production to a 
minimum and to stabilize them in so much as it no longer 
need pay a profit to intermediate manufacturers and pro- 
ducers of raw materials. But since integration demands 
the closest cooperation between the several units that per- 
form the different stages of manufacture leading up to the 
final stage involved, it necessitates a much more compre- 
hensive and durable control than might suffice to bind a 
horizontal combination together. For this reason vertical 
combinations are usually built up through the acquisition 
of an ownership interest in the several units that are to be 
combined. 

In the iron and steel industry one of the chief forces 
back of the integration movement seems to have been the 
change in demand from iron to steel. The process has 



CAUSES AND FORMS OF COMBINATION 249 

been well described by the president of the Republic Iron 
and Steel Company in testimony taken in a suit for the 
dissolution of the United States Steel Corporation. This 
account is as follows: "We have practically eliminated 
all our scattered iron mills, have concentrated them in the 
operation at a few points of production. So, today we 
produce practically but little iron and are manufacturing 
about 1,000,000 tons of steel per anum. This is what we 
call an integrating process; that was part of it, the 
addition of the mineral and coke and blast furnaces, and 
balancing up operations generally completing the integrat- 
ing process. . . . This integrating process that I speak of 
attended our development of the steel end of our business. 
We did not need it so much when we were simply manu- 
facturing iron. It was done for economic and trade reasons 
on account of the increased demand for steel and the de- 
creased demand for iron." ^ 

The great period of integration in American industry 
was ushered in about 1897. Business had just emerged 
from a long period of depression which began with the 
financial collapse of 1893. Several events occurred and cer- 
tain circumstances were present that gave the integration 
movement the initial impetus that it required to set it 
in motion. The first of these events was the passage by 
the legislature of the state of New Jersey of an act giving 
to all corporations chartered by that state the power to 
hold the securities of other New Jersey and foreign cor- 
porations, and to exercise with respect thereto all the rights 
and privileges of natural security-holders. Thus, a new 
form of organization, most admirably adapted to combina- 
tion purposes, was provided. The second event was the 
wonderful American wheat crop of 1897 coupled with a 
general failure of crops in Europe. While Europe had 
a shortage of from 300 to 400 million bushels, we had 

^ United States v. United States Steel Corporation, 223 Fed. 55. 



250 COMBINATION ORGANIZATIONS 

a surplus of over 100 million bushels. This condition 
resulted in a real, thoroughgoing industrial revival. Compe- 
tition was soon again at its height and showed all indi- 
cations of the approach of a general battle of giant es- 
tablishments for the elimination of the weaker and the 
survival of the fittest. In the third place, there was an 
equally rapid expansion of our foreign trade- During 
the depression the American people had been economizing 
and by 1897 vast quantities of manufactured products had 
accumulated. The manufacturers feared that these would 
glut the market and decided to get rid of them. Germany 
and Great Britian had recovered from the depression some- 
what earlier than the United States, and had begun a 
period of rapid colonial development. The American goods 
were rushed into these colonies, into Russian and European 
markets, even to Germany and England, where they were 
sold at much less than the cost of their manufacture. As 
a result, our export trade in manufactures jumped by 
hundreds of millions of dollars. In addition to these fac- 
tors there were on hand in the American banks, insurance 
and trust companies vast accumulations of investable funds 
representing the savings of the people. The financiers 
were ready to put these funds to work. Opportunity 
beckoned and the industrial and professional promoter 
answered the call. The period of combination that fol- 
lowed, with the possible exception of that which occurred 
in Germany following the close of the World War, has had 
no parallel in history. 

During the first few years of the period, the combina- 
tions, or " trusts " as they have been popularly called, 
were largely along horizontal lines. Railways were consoli- 
dated into a few great systems, ocean and coastwise steam- 
ship combinations were formed and the number of estab- 
lishments in several stages of production in the iron and 
steel industry was reduced. This lasted until 1901, when 



CAUSES AND FORMS OF COMBINATION 251 

a general scramble to integrate was ushered in through the 
formation of the United States Steel Corporation. But there 
was only so much money with which to do the work. The 
movement came to a stop in 1902 as suddenly as it had 
begun. Not only had the supply of investable capital be- 
come exhausted, but the general public had lost confidence. 
Professional promoters, impelled by speculative profits, 
had poured so much " water " into many of these combina- 
tions that they soon failed, causing a loss of millions to 
gullible investors who had relied upon false prospectuses. 
Speculation overdid itself and hundreds of millions in the 
stocks of these great combinations were batted back and 
forth like shuttlecocks between brokers and speculators on 
the exchanges. There they remained for a period of years 
until the time when the public could be convinced that 
they were legitimate and reasonably safe investments. 
Even today the public remains unconvinced of the sound- 
ness of many of them- 

During the period from 1902 through the depression fol- 
lowing the financial panic of 1907, the forces making for 
combination were noticeably dormant. But with the re- 
vival of business in 1909, combinations began again to be 
formed, particularly in the newer industries, such as auto- 
mobile manufacture and its related undertakings. The 
outbreak of the World War in the summer of 1914 checked 
it temporarily, only to give it a new impetus during 1915, 
1916 and the first few months of 1917. These years wit- 
nessed many combinations, both along horizontal and ver- 
tical lines, among munition establishments, shipping and 
foreign trade concerns and retail trade companies, while 
the great steel companies erected shipbuilding plants and 
carried their integration a few steps forward. This short 
period was again brought to a close with the advent of the 
business depression that began in 1919. 

In Europe, the progress of combination had a similar 



252 COMBINATION ORGANIZATIONS 

history but was by no means uniform in the several coun- 
tries. In England, it can be said to have begun shortly 
after the passage of the Limited Companies Act, of 1862, 
and to have reached the climax during the decade from 
1880 to 1890. The English business combination is neither 
horizontal nor vertical, but rather financial in character, 
being effected through what is called the " investment 
company " described in a later chapter. The reasons for 
the deflection of the movement along this peculiar tangent 
are perhaps to be found in the laws against organizations 
and combinations in restraint of trade, in the conception 
based upon economic teachings, that free competition is the 
natural order of business which may best be conducted as 
individual enterprise, and in the policy of free trade that 
makes it almost impossible to have higher prices within the 
country than exist without. But despite these obstacles, a 
few combinations have been formed, particularly in the 
South African Mining Industry and in the manufacture of 
soap. Lever Brothers, Ltd., have practically a monopoly 
of the latter industry. These, however, are but exceptions 
rather than the rule. 

In Germany, the combination movement appears to have 
begun in earnest during the decade preceding the year 1890. 
Instead of being legally suppressed, it was encouraged. 
As a result of this attitude it naturally followed the hori- 
zontal lines which did not generally affect the ownership 
interest, but brought into being great syndicates to control 
the distribution of the product. These syndicates are 
called ''kartells." The exactin^g requirements of the law 
concerning corporate promotions and capitalization appear 
to have interfered somewhat with the process of integration, 
and to have brought about a condition of financial combina- 
tion centering about the great banks, while large numbers 
of so-called " finance companies " tie the establishments of 
each industry together into a vast, more or less unified 



CAUSES AND FORMS OF COMBINATION 253 

network dominated by a central concern and its affiliated 
banking interests- However, since the close of the war the 
weakness of horizontal combination has become apparent. 
It is too susceptible to control by labor organizations and 
presents too good a target for the application of state con- 
trol or the institution of state ownership. Thus, under the 
leadership of such men as Hugo Stinnes, August Thyssen, 
the Krupp group and others, a period of integration has been 
ushered in that has been surpassed only by the great 
American trust period. What the final result of this move- 
ment will be, it is difficult to foretell. 

In Belgium, combinations have followed the lead of Ger- 
many, since its industrial system corresponds most closely 
to that of its larger neighbor. France, which is not an 
industrial country in the modern sense of the term but 
rather has contented itself with putting its savings into 
foreign investments, seems in a large measure to have 
followed the English example. Switzerland with its cosmo- 
politan population, seems to have borrowed not only from 
its several European neighbors but also from the United 
States. Combinations in other European countries have, 
for the most part, emanated from one or the other of 
the greater industrial nations and cannot be said to have 
been influenced greatly by any native or local 
considerations. 

Classification of Combination Organizations. — Enough 
has already been said to indicate that there are several 
types of organizations that may be employed for purposes 
of combining entrepreneurial units. These may be divided 
into two broad groups, namely, (1) those that do not 
ordinarily involve a claim on the capital of the units 
involved and (2) those that are instituted through the 
ownership right. In each group there are several classes 
as shown by the following outline : 



254 COMBINATION ORGANIZATIONS 

A. Combinations ordinarily not involving ownership 
rights : 

(1) Associations formed by means of agreements between units 

that retain their autonomy, but pledge themselves to 
cooperate in carrying out the aims and purposes of the 
organization. They are commonly known as "business 
men's associations." 

(2) Factors' Agreements, whereby producers and distributors 

seek to exercise a control over the product with respect 
to price, conditions of sale, etc., while it is being dis- 
tributed by independent businesses. The most common 
types are " price control agreements," " tying contracts," 
and the like. 

(3) Federations created by agreements between combining 

units that retain considerable autonomy, but delegate 
to a central body in which they are usually represented 
the power to control certain phases of their business. 
There is usually documentary evidence of their exist- 
ence. The most important types are known as " pools," 
" kartells " and " syndicates." 



B. Combinations involving ownership rights: 

(4) Securities-combinations formed through the acquisition 
by a person or a business organization of the securities 
issued by other ownership organizations. They may or 
may not be for the purpose of control. Where control is 
the aim it is exercised through apphcation of the rights 
resting in the security-holder. The holding corporation, 
the combination trust and, more rarely, the joint stock 
company are employed for this purpose. The various 
means of utilizing this method of combination will be 
described under the title of secujJMsszSubstitution 
companies. These constitute the most characteristic 
Ownership feature of our modern business organization. 



CAUSES AND FORMS OF COMBINATION 255 

(5) Fusions arising out of a unification of the assets, liabili- 
ties and general business of several units, leaving but a 
single unit. They include " mergers " and "amalga- 
mations." 2 

This classification is based upon the extent to which the 
independent action and existence of the individual owner- 
ship unit is compromised, limited or controlled. There is 
no clear-cut line of demarcation dividing the several types. 
A single combination may employ one or more of them in 
its make-up. While pure forms, that are representative of 
the several classes, are very common, they are perhaps no 
more so than the hybrid types. For this reason it is deemed 
advisable to describe and treat them in groups, namely; 
(1) those that ordinarily do not involve ownership rights 
and (2) those that involve such rights directly. And while 
it may be objected that the former class is not a proper 
subject for a work of this kind, because those types of 
combinations introduce no new principle into the ownership 
organization; yet it must be conceded that without some 
understanding of these forms of combination, it would be 
difficult to portray the ownership organizations of today to 
a degree even approaching completeness. 

2 Combinations formed under methods 4 and 5 are frequently 
called consolidations. Under this heading the several types of 
fusions were fully explained in Chapter XI. 



CHAPTER XIV 

COMBINATIONS ORDINARILY NOT BASED ON OWNER- 
SHIP RIGHTS 

A. Associations as Business Combinations 

Association is a human instinct that is quite as preva- 
lent among business entrepreneurs as in any other class of 
society. It furnishes that element of cohesion essential to 
the existence of organized civilized society; and is es- 
pecially developed in the field of business enterprise where 
it fosters that stability and progress so necessary for the 
fullest development of business opportunity. No class of 
persons knows better than the business man the value of 
association, and no other class has utilized it to such great 
advantage. He knows full well the truth of the old adage 
'' in union there is strength," and proceeds to organize his 
general and specialized types of associations. This he has 
done for centuries and is still doing, on a grander scale 
than ever before. 

Back in the middle ages the chaotic and unstable politi- 
cal conditions led to the development and organization of 
the Gild Merchant in the incorporated towns and boroughs 
where business first began to rear its infant head. These 
organizations had for their purpose, among other things, 
the adoption of uniform trade practices, weights and mea- 
sures and the like; but they soon became part and parcel 
of the town government and lost their business character. 
Trade Gilds made up of all masters (entrepreneurs) en- 
gaged in a given trade within the community, took their 
place as business men's associations. The weavers, 

256 



ASSOCIATIONS, FEDERATIONS, ETC. 257 

butchers, bakers, fullers, wheelwrights, etc., each had their 
own trade gild seeking to control conditions, production, 
prices and the like. At a later date, when foreign com- 
merce slowly made its way through pirate-infested seas 
to more or less hostile foreign shores, there arose in Eng- 
land the Merchants of the Staple and the Merchant Ad- 
venturers ; associations that, with the aid of the king, sought 
to stabilize, foster and protect this new born trade, that 
they and their communities might benefit thereby. In 
Northern Europe, particularly in Germany, there grew up 
in the same way the Hanseatic League. This League, be- 
cause of the impotency of the governments of the numerous 
small states in which its members carried on their com- 
mercial enterprises, was soon forced to take upon itself 
also political and governmental duties. And while it was 
primarily a commercial organization, it was more powerful 
than many monarchs of its day. 

From these early beginnings the business men's associa- 
tion has come down to us in the form of chambers of com- 
merce, boards of trade, commercial associations and trade 
and industrial associations. Shorn of its active govern- 
mental powers by relatively strong and stable governments, 
it contents itself largely with building up and developing 
its community, trade or industry, with shaping commercial 
and labor policies, tax programs and the like. It is ever 
active and watchful of legislation affecting business. There 
is scarcely a municipal, state or national government where 
its lobbyists are not constantly at work- And even today, 
it occasionally rises up in its might to oust from office a 
political party whose policies it does not like, as is well 
shown by the part played by such associations in breaking 
the hold of the Non-Partisan League in North Dakota. 

These present day business men's associations may be 
divided into three broad classes, namely; (1) those that are 
general and essentially territorial in character; (2) those 



258 COMBINATION ORGANIZATIONS 

that include only business units engaged in a particular 
trade or industry; and (3) those that have some special 
purpose in view. 

General Commercial Associations. — Among the general 
business associations of the United States, the Chamber of 
Commerce of the state of New York is said to be the 
oldest, dating back to 1768. The purpose of the organi- 
zation is stated in the resolution creating it as follows: 
" mercantile societies have been found very useful in trad- 
ing cities for promoting and encouraging commerce, sup- 
porting industry, adjusting disputes relative to trade and 
navigation, and procuring such laws and regulations as 
may be found necessary for the benefit of trade in gen- 
eral. . . ." It has since widened its activities and gives 
attention to all matters of local, state and national concern. 
In most of our states there now are similar general assoc- 
ciations. 

The merchants and business men of our larger cities 
also have formed general associations patterned after the 
state associations, but local in character. New York City 
has its Merchants Association; Chicago and New Orleans, 
their Associations of Commerce; Detroit, its Board of 
Commerce; and among others Boston, Cincinnati Cleve- 
land, Los Angeles, Philadelphia, Portland, San Francisco 
and St. Louis, their chambers of commerce. A great 
many smaller cities and towns also have their own local 
associations patterned after these. 

Since about 1900 these state and local associations have 
made frequent attempts to organize a national chamber of 
commerce. The first attempts met with little success- But 
in 1912, Secretary Nagel of the Department of Commerce 
and Labor, at the suggestion of President Taft called to- 
gether representatives of state and local associations, and 
out of this meeting sprang the Chamber of Commerce of 
the United States of America. The by-laws of this or- 



ASSOCIATIONS, FEDERATIONS, ETC. 259 

ganization state its aims to be : " To secure cooperative 
action in advancing the common purposes of its members, 
uniformity and equality in business usages and laws, and 
proper consideration and concentration of opinion upon 
questions affecting financial, commercial, civic and in- 
dustrial interests of the country at large." In the follow- 
ing year it was reported to have had a membership consist- 
ing of over 600 commercial organizations and over 1,700 
individuals. The vote of the members on all matters is 
usually obtained by mail. 

Trade and Industrial Associations. — However, these 
general associations do not afford the business man all 
the advantages that he seeks. Each trade and industry has 
its own special problems that may best be dealt with 
through special associations. Local butchers, grocers, 
druggists, bankers, etc., frequently form their own asso- 
ciations, as also do manufacturers of steel, automobiles 
and other commodities. Thus, we find in this country the 
Philadelphia Association of Retail Druggists, the Califor- 
nia Fruit Growers' Association, the New York Tow Boat 
Exchange, the Michigan Salt Association, the Southern 
Pine Association and hosts of others. But in many trades 
and industries there also are national or regional combina- 
tions, such as the National Automobile Chamber of Com- 
merce, the American Iron and Steel Institute, National 
Association of Window Glass Manufacturers, American 
Association of Button Manufacturers, National Wholesale 
Druggists' Association, National Association of Retail 
Druggists and the Copper Producers' Association. 

Special Purpose Associations. — It is often found desira- 
ble to organize associations for special purposes. In this 
case the character of the membership resembles that of 
the general associations, but is more restricted. The most 
prominent representatives of this class are the numerous 
foreign trade associations that have shown an astonishing 



260 COMBINATION ORGANIZATIONS 

development since the close of the World War. They 
are represented by such organizations as the American 
Manufacturers Export Association, the Philadelphia Com- 
mercial Museum, the Exporters' and Importers' Associa- 
tion, the Export and Import Board of Trade of Baltimore, 
the Foreign Trade Club of San Francisco and the National 
Foreign Trade Council of New York. Among them may 
also be included the numerous American chambers of com- 
merce established in foreign countries. They are to be 
found in such cities as London, Berlin, Paris, Milan, Naples, 
Brussels, Shanghai, Mexico City and many others. Their 
chief purpose is to promote friendly foreign trade relations, 
to develop foreign markets and to suppress questionable 
trade practices. 

Business Associations in Other Countries. — Prior to 
1914, business associations of the type under consideration, 
had perhaps attained a greater development in Germany 
than in any other country. However, European business 
establishments emerged from the late war in a much weak- 
ened condition which placed them temporarily at a dis- 
advantage in competing against the strong American firms 
that had sprung up. As a result a general reorganization 
involving all forms of combination set in, and in most of 
the industrial countries of Europe strong national associa- 
tions of business men were formed. In England arose, in 
1916, the Federation of British Industries, which in four 
years enrolled no less than 1,300 members including some 
200 trade associations. It is reported to be in direct or 
indirect touch with over 20,000 British manufacturers, 
covering every industry in the country. Its governing 
board consists of 211 members made up of the leading men 
in all industries. In Germany, in 1919, the Reichsverband 
der Deutschen Industrie was formed by consolidating two 
prior existing organizations, namely, the Zentral Verbjihd 
der Deutschen Industriellen and the Bund der Industriellen. 



Oy 



ASSOCIATIONS, FEDERATIONS, ETC. 261 

It includes in its membership several hundred associations 
representing about 50,000 firms, either directly or through 
affiliated associations. Its purpose is stated to be to ad- 
vise concerning the fulfillment of the economic provisions 
of the peace treaty, to study and recommend tax policies 
and to aid in promoting sound economic policies- In 
Fr^niifi, in 1915, L'Association National d'Expansion 
Economique was formed under the auspices of the Paris 
Chamber of Commerce. It comprises most of the import- 
ant manufacturers, trade associations, insurance, banking, 
shipping and railway interests of France. 

One of the latest developments in this type of combina- 
tion organization is the International Chamber of Com- 
merce. This association was formed in 1920 with its 
official seat at Paris. It is intended to serve as a clearing 
house for international business information; to consider 
laws affecting commerce; to suggest changes in the enact- 
ment of new measures that will improve conditions; to 
affect reforms on its own initiative in business customs 
and practices to bring better results; and to gather and 
distribute information necessary to the better conduct of 
commerce and to suggest improvements of the existing 
system to governments. 

Tendency to Federate for Purpose of Control. — There 
has always been a marked tendency among the trade and 
industrial associations to inaugurate schemes for the con- 
trol of prices, production and distribution of the com- 
modities in which their members deal. To accomplish 
this end some have frequently availed themselves of the 
Use of factor's agreements, while others have strengthened 
their organization so that this partook more of the char- 
acter of a federation, in so far as it sought to gain power of 
control over certain aspects of its members' business. 
These practices have caused many of them to be called 
before the courts charged with violating the provisions of 
the federal Anti-Trust Laws and similar state statutes. 



262 COMBINATION ORGANIZATIONS 

B. Factors' Agreements as Instruments of 
Combination 

Factors' agreements may be defined as contractual 
arrangements whereby one of the contracting parties se- 
cures a limited control over the freedom of action of the 
other in business matters. Usually, they aim to diminish, 
moderate or prevent competition in the sellers' line of 
commodities. The provisions of the Sherman Act, declar- 
ing agreements in restraint of trade to be unlawful, are 
aimed at them, and the Clayton Act of 1914 gives them 
even greater attention under provisions against the use of 
unfair methods of competition. 

A careful study of agreements of this kind brought to 
light through court proceedings, shows that their variety is 
very great.^ However, for sake of convenience they may 
readily be classified into three kinds, namely; (1) condi- 
tional requirements; (2) exclusive arrangements; and (3) 
preferential arrangements with or without rebates. 

Conditional Requirements. — This type of factors' 
agreement is frequently employed by manufacturers or 
dealers who have a more or less complete control over cer- 
tain kinds of commodities, to bind the purchaser of these 
commodities to buy only from the seller certain other 
commodities over which the latter has no such control. 
Thus, manufacturers of patented articles and machines 
often insert in their contract of sale that the buyer, or 
dealer shall purchase certain non-patented articles or 
those on which the patent monopoly has expired, only from 
the seller of the patented article. Others again require 
the buyer to handle new lines of commodities as a condition 
of continuing to handle old lines, or to purchase certain 
commodities as a condition of the purchase of others. 

1 Specimens of such agreements may be found in Dr. W. H. S. 
Stevens' Industrial Combinations and Trusts. See also Unfair 
Competition by the same author. 



ASSOCIATIONS, FEDERATIONS, ETC. 263 

For example, between 1906 and 1909 the General Electric 
Company secured from the German owners the patents 
and applications covering tungsten and tantalum filament 
lamps. The demand for electric lamps in this country was 
such that dealers were more or less obliged to handle 
not only the old carbon filament lamp but also the two 
newer types above mentioned. Patents covering the car- 
bon lamps had expired, in 1894, and many manufacturers 
had lamps of this kind on the market- Among them was 
the General Electric Company. This company set about 
securing all of the carbon lamp business. Since the newer 
types could be bought only from it, it stipulated in its 
contracts of sale that purchasers of tungsten and tantalum 
lamps must also buy from it all of their carbon filament 
lamps. The United States Supreme Court, however, de- 
clared these contracts to be an unlawful restraint of trade. 

The " full-line forcing " — a practice of requiring dealers 
to order new lines of products as a condition to retaining 
the agency for some brand of the company's harvesting 
machines — employed by the International Harvester 
Company is another such practice discountenanced by the 
courts. The United Shoe Machinery Company, the 
Motion Picture Patents Company and the American Coal 
Products Company also made extensive use of factors' 
agreements of this type. 

Exclusive Arrangements. — Professor W. H. S. Stevens 
defines exclusive arrangements as " arrangements which 
require that certain dealings or transactions shall be con- 
fined exclusively to a specified organization or organiza- 
tions." ^ They are frequently included in contracts in- 
volving conditional requirements. 

Three types of exclusive arrangements have been com- 
monly used, namely; those that require (1) exclusive use; 
(2) exclusive sale; and (3) exclusive purchase of the com- 
2 W. H. S. Stevens, Unfair Competitdon, p. 77. 



264 COMBINATION ORGANIZATIONS 

modity in question. For example, the United Shoe Ma- 
chinery Company stipulated in its contracts, that the 
lessors of certain of its patented machines should use them 
only in connection with nails and other commodities sold 
by that company for the manufacture of boots, shoes and 
footwear. The American Tobacco Company provided in 
its contracts with dealers, that the exclusive sale by them 
of its products would entitle the dealers to a rebate of 7 
per cent, whereas otherwise the rebate would be but 2 per 
cent. But in many cases they completely cut off the 
supply of their cigarettes to dealers who did not handle 
the American Tobacco Company's products exclusively. 
The National Wall Paper Company and the Eastman 
Kodak Company usually stipulated in their contracts with 
dealers, that the latter bound themselves to purchase only 
the product of the respective companies. 

Preferential Arrangements. — Provisions in contracts 
of sale, whereby dealers or users of the commodity are given 
rebates and other special reductions in the purchase price 
of the commodity for the purpose of suppressing competi- 
tion, have been very common. These are now usually 
called preferential arrangements- The records of the fed- 
eral courts give many examples where they were used by 
railroads, steamship companies and industrials. They 
helped build up the Standard Oil and the tobacco monop- 
olies and numerous others. In the case of the Standard 
Oil Trust they took the form of rebates given to that com- 
bine by railroads on the freight charges for oil transported, 
an advantage that other oil companies did not enjoy. The 
American Tobacco Company used a similar practice in 
connection with exclusive arrangements to build up a semi- 
independent distributive organization over which it might 
exercise control. 

All of these three types of factors' agreements serve at 
their best as a very weak form of combination, since 



ASSOCIATIONS, FEDERATIONS, ETC. 265 

there is in most cases no legal means of forcing compliance 
with them. While they still crop out occasionally, they 
are nevertheless becoming less common, and are gradually 
giving way to ownership combinations built up on the 
integration principle. 

C. Federations 

The federation, as before stated, differs from the associa- 
tion and the factors' agreement in that it provides in the 
agreement creating it for a central body which shall exer- 
cise some measure of control over the business of the com- 
bining units. This power o: control usually hinges upon 
one or more of three factors, namely; (1) the supply of 
the commodity in question; (2) the market or demand for 
it; and (3) the price at which it is to be sold. It may or 
may not be accompanied by penalties to be imposed upon 
recalcitrant members. The chief aim and purpose of these 
combinations is the suppression of competition. In the 
United States they are called pools, while in Europe the 
name kartell, or syndicate is applied to them. 

Federations ordinarily are combinations of the horizontal 
type, including in their membership few or many establish- 
ments in like stages of production or distribution. Occa- 
sionally, however, we do find federations of manufacturers, 
wholesalers and retailers, respectively, bound together 
through factors' agreements into a gigantic combination 
that has a complete control of the entire trade in a given 
type of commodity. As a matter of fact, there seems to 
be a marked tendency on the part of these combinations 
to extend their control as far as possible. In the United 
States, this soon brings them before the courts as violators 
of the anti-trust laws. In Europe, on the other hand, they 
enjoy quite generally the sanction of the law, and are fre- 
quently even fostered and encouraged by the governments. 

The American Pools. — Pools became prominent in the 



266 COMBINATION ORGANIZATIONS 

United States during the decade following the year 1870. 
At first they were successfully used by the railroad com- 
panies, who employed all three of the basic elements above 
mentioned in organizing them. Somewhat later, the in- 
dustrial and trade branches of business took up this form 
of organization. It was early recognized that they not 
only sought to restrict competition, but that they actually 
did so. Thus, when the Interstate Commerce Commission 
Act (1887) and the Sherman Anti-Trust Act (1890) were 
passed, they included provisions seeking to suppress pools 
that substantially reduced competition and unduly re- 
strained trade between the states or with foreign nations. 
This resulted in the development of new forms that it was 
hoped would, at least technically, be outside the pale of 
these laws. Nevertheless, it remains a fact that they seek 
to suppress competition; and one need not look far in the 
annals of court decisions under our anti-trust legislation 
to find many of them that have been adjudged to violate 
these laws. 

A careful study of the documentary evidence contained 
in these decisions, and of specimens of pool agreements 
disclosed in reports of Congressional and other committees, 
enables us to classify American pools according to the 
means used to accomplish the end in view. From this 
standpoint we recognize a number of distinct methods that 
have been used in organizing pools. However, several of 
these may be emploj^ed in a single pool. They are as 
as follows: 

1. Percentage Division of Business. — The total busi- 
ness done by all those in the pool is allotted to the various 
members usually in proportion to their productive capacity, 
and these agree to stay within their limits or pay a penalty 
to the pool on exceeding their percentage. Bonuses are 
commonly paid to those who produce less than their 
allotted percentage. The percentage contributed by each 



ASSOCIATIONS, FEDERATIONS, ETC. 267 

firm to the total production of the preceding year is taken 
as a basis. The scheme has no legal sanction, and is not 
enforceable at law. Nevertheless, pools of this type have 
been fairly common in the steel industry, for steel rails, 
structural steel, wire nails, etc., in the hardware business 
in the manufacture of saws, screws, shovels, door hangers, 
etc., in the distilling and other industries. The tendency 
of the stronger firms to crowd out the weaker ones who 
have no protection at law under the agreement, tends to 
cause frequent disruptions of these pools. 

An excellent example of this type is the Structural Steel 
Association of 1897.^ There were ten members in this 
association, each of whom was permitted to take up to a 
certain per cent of the total monthly sales of structural 
steel. The apportionment of business in percentage was 
as follows: 



Carnegie Steel Co. (Ltd.) 

Jones & Laughlin (Ltd.) 12% 

A & P. Roberts Co 111/2 

Passaic Rolling Mills Co 6 

Phoenix Iron Co. . . . „ 5 

Cambria Iron Co 5 

Universal Construction Co 4^/4 

Pottsville Iron & Steel Co 3 

Cleveland RoHing Mill Co 3 

In addition, it was provided that the New Jersey Steel & 
Iron Company should receive $5,000 per year to remain 
inoperative in the manufacture of structural steel. 
Monthly statements were to be rendered to the association's 
" commissioner " who was to assess members one-half a cent 
per pound for excess sold and to pay a bonus of a like 
amount to those who sold less than their quota. 

The agreements of the " Steel Rail Pool," of 1887, and of 
the Tin Plate Association, of 1900, contained similar 
provisions.* 

3 For a copy of the agreement see Stevens, Industrial Combina- 
tions and Trusts, pp. 211-219. 
* Ihid. pp. 69-71 and 219-225 respectively. 



268 COMBINATION ORGANIZATIONS 

The Brewers' Association, embracing five brewing com- 
panies of the city of Washington; provided in its agree- 
ment not only for an apportionment of the business, but 
coupled this with a price-fixing scheme and a prohibition 
against any customer of a member selling to the customers 
of another.^ 

2. Curtailment of Output. — These pools seek to reduce 
competition by curtailing the output, either uniformly or 
otherwise, of the several members. Thus, in 1881, when 
the western distillers found that the prices they were get- 
ting for their product were really below the cost of produc- 
tion, they decided to limit the quantity of whiskey pro- 
duced. They formed the " Western Export Association," 
the officers of which were authorized to levy a monthly 
assessment on each distiller running his plant. This 
assessment was to be proportionate to the amount of grain 
used in the manufacture of spirits, and was to be used to 
facilitate the exportation of the surplus product. The pool 
broke up the following year because some members failed 
to pay their assessments, but it was reconstituted a few 
months later. From 1883 until 1887 the pool continued for 
a year at a time, with suspensions as often as once a year. 
Most frequently it provided for limiting the output of the 
distilleries. Thus, in 1884, it was stipulated that " only 
28 per cent of the full capacity shall be operated, and no 
stocking up beyond this amount allowed under any circum- 
stances." In 1887, it was definitely supplanted by a trust 
form of organization.^ Another excellent example is the 
Washington Red-Cedar Shingle Association which com- 
bined this feature with regulation of prices. It was formed 
in 1889, and was empowered to issue from time to time a 
minimum price below which all members agreed not to sell 

^ Leonard v. Abner-Drury Brewing Co., 25 Appeal (D. C.) 161. 
^ An excellent description of this pool and the trust that sup- 
planted it will be found in Ripley's Trusts, Pools and Corporations. 



ASSOCIATIONS, FEDERATIONS, ETC. 269 

shingles to dealers and wholesalers, to establish a system 
of prices at which shingles must be sold to retail dealers, 
and to order the closing down of all mills, and to take other 
necessary steps to curtail the output of Washington red- 
cedar shingles when this appeared to be necessary/ 

On the whole, this type of pool is too simple. It is un- 
enforceable at law and the larger members tend to exceed 
their allotment of production. 

3. Territorial Division of Market. — By this method the 
territorial market supplied by the members of the pool is 
broken up, and a part allocated to each member. Thus, 
the '' Fundamental Agreement " of the American powder 
manufacturers (1889) provided not only for a division of 
territory among the members, but also for yearly allot- 
ments of the number of kegs of each variety of powder 
that each concern should be permitted to make. The 
agreement was made enforceable through a " Board of 
Trade." In 1897, these American powder manufacturers 
entered into a similar pool with the Vereinigte Koln- 
Rottweiler Pulverfabriken, of Germany, and the Nobel 
Dynamite Trust, of London, whereby the three divided the 
world's market area into exclusive territories.^ In 1902, 
two similar international agreements were entered into be- 
tween six American tobacco companies and the Imperial 
Tobacco Company of Great Britain whereby the United 
States, its possessions and Cuba became the exclusive 
market of the American companies, while the United King- 
dom fell to the Imperial Company, and the rest of the 
world was to be supplied by the British-American Tobacco 
Company which was controlled by the contracting parties.^ 
A similar, but much more complicated division of market 
was provided for in the agreement creating the famous 
Addystone Pipe Pool- The United Coal Tar Refining 

7 Gibhs V. McNeeley et al, 118 Fed. 120. 

8 These agreements have been published in Stevens, Industrial 
Combinations and Trusts, pp. 176-183 and 195-205. 

9 Ibid. pp. 161-176. 



270 COMBINATION ORGANIZATIONS 

Company, the American express companies, and the rail- 
roads did the same thing. It is also a common practice 
among the European kartells and syndicates. 

4. Centralized or Joint Sales Plan. — Under this plan 
the combining concerns agree to form an association or 
company which shall have the exclusive right to sell all, 
or at least a large part, of their total product. In most 
cases the central organization is an incorporated company. 
They are common in the marketing of fruit, tobacco and 
produce, coal and metals, and are also used to secure 
greater competitive power when selling in foreign markets. 

One of the earliest of this type of pool was the Michigan 
Salt Association, organized by the salt producers of the 
Saginaw Bay District of Michigan, in 1876 for a term of 
five years and renewed for a like term in 1881. It placed no 
restriction, whatever, upon the quantity of salt produced, 
but provided that " each and every contractor shall manu- 
facture salt for this association on the terms and conditions 
as follows: That he will make salt solely on the associa- 
tion's account, of the best quality of the kind manufactured 
by him, according to the conditions of his lease." Salt 
might, however, be manufactured for other than association 
account by paying ten cents per barrel to the association. 
In this way it succeeded in preventing competition among 
the Michigan manufacturers and in stabilizing prices. 
In 1899, it became an easy victim of promoters who took 
its members into the National Salt Company of New 
Jersey. In 1901, the International Salt Company was 
formed to combine the National and other American and 
foreign companies; but it was so highly over-capitalized 
that it became insolvent in 1902. Its great weakness lay 
in the fact that it could not successfully keep down com- 
petition. A similar pool was the Naval Stores Pool with 
headquarters at Savannah, Georgia.^" 

10 The former organization is well described in Ripley's Trusts, 
Pools and Corporations while the. agreement for the latter may be 
found in Stevens, Industrial Combinations and Trusts. 



ASSOCIATIONS, FEDERATIONS, ETC. 271 

In 1908, the tobacco growers of the Burley District of 
Kentucky found it necessary to protect themselves against 
the centralized purchasing methods employed by the 
American Tobacco Company. They formed the Burley 
Tobacco Growers' Association through which the several 
hundred members were enabled to confront the single pur- 
chasing agent of the Tobacco Company with a single sales 
agent. The association gained considerable notoriety be- 
cause of its practice of employing " night riders " to lay 
waste the crops of such farmers as did not join its ranks. 
In 1920, it refused to sell its tobacco at the prices offered 
for it. Similar organizations are the California Fruit 
Growers' Association and the Raisin Growers' Association 
of California. 

Under the Webb Act, passed by Congress in 1918, legal 
sanction was given to combinations of corporations engaged 
solely in " trade or commerce in goods, wares or merchan- 
dise exported, or in the course of being exported from the 
United States or any territory thereof to any foreign 
nation." Within a few years, more than a hundred such 
organizations were formed. They vary in form from loose 
combinations to well organized corporations. An example 
of the former type is the Textile Alliance Export Associa- 
tion. Any member of the American Association of Woolen 
and Worsted Manufacturers, the National Association of 
Woolen Manufacturers, the National Council of American 
Cotton Manufacturers and the Association of Cotton Tex- 
tile Manufacturers may become a member of the Export 
Association. Membership is dependent upon the owner- 
ship of at least 50 shares of the 7 per cent cumulative non- 
voting stock and carries with it the privilege of having a 
full line of goods carried by the association. Control is 
vested in the four associations through common stock of 
no named par value issued to them at a nominal price. 

An example of the second class is the Consolidated Steel 



272 COMBINATION ORGANIZATIONS 

Corporation formed by ten American steel companies, ex- 
cluding the United States Steel Corporation which has its 
own export company. The Consolidated's capital is 
$10,000,000 which is issued to members in proportion to 
their output for export through it. The stock allotments 
are held in trust by a board of trustees that nominates 
the list from which the board of directors is chosen by a 
majority of the stock interests. The stock allotments are 
readjusted annually on the basis of exportations for the 
year. 

5. Central Purchase of Total Supply for Resale. — 
There are several varieties of this type of pool; first, those 
that are organized by fabricators for the purchase of their 
raw materials; second, those organized by merchants for 
the joint purchase of merchandise for re-sale, and third, 
the so-called '^ valorization " arrangements. 

Thus, in a case brought against the National Window 
Glass Jobbers' Association, it was shown that this associa- 
tion was a corporation formed by 75 per cent of the window 
glass jobbers and dealers in the United States, and that 
they controlled it through stock ownership. This so-called 
" association " then contracted with the American Window 
Glass Company to take a large part of the latter's product, 
and to sell the glass at predetermined prices through its 
own stockholders. The parties to these agreements 
pledged themselves to buy from others only at much lower 
prices than they paid among themselves and to sell to 
others only at considerably higher prices.^^ 

Numerous attempts have been made to organize pools 
of this type to handle the total supply of raw material of 
a given kind such as cotton, copper and coffee. Unless 
they provide at the same time for control over the supply 
of such products, they invariably fail. This arises from 

11 Wheeler-Stengel Co. v. National Window Glass Jobbers' Assn. 
(1907), 152 Fed. 864. 



ASSOCIATIONS, FEDERATIONS, ETC. 273 

the fact that as the outside supply becomes scarce the 
price will rise, and the inducement to increase production 
will be greater. Such was the experience of John Hays 
Hammond when he attempted to corner the cotton supply, 
and also of the French Copper Syndicate which carried 
several banks with it when it collapsed. The Brazilian 
Government's coffee valorization plan met with little better 
success for similar reasons. In 1906 and 1907 over-produc- 
tion of this crop was, making itself felt. Ruin faced the in- 
dustry. The states of Sao Paulo, Minas Geraes and Rio 
de Janeiro then agreed to purchase and hold for better 
prices enough coffee to keep out of the market all but a 
quantity sufficient to supply the world demand. Subse- 
quently two of the states withdrew leaving Sao Paulo to 
handle the situation alone. This state then borrowed 
$88,400,000 with which it purchased over eight million bags 
of coffee, but even the withdrawal of this amount did not 
raise the price, and with a new crop maturing the state 
faced bankruptcy. It eventually succeeded in raising 
sufficient money through foreign loans to tide it over but 
was forced to abandon the valorization plan. A factor 
contributing to the collapse was the decision by the United 
States courts declaring this to be a monopoly in restraint 
of trade, thus interfering with its operations in the 
American market. 

6. Price Fixing Pools. — This type of pool is quite 
common. One of their outstanding characteristics is the 
extensiveness of these organizations. It is this feature that 
frequently brings them before the courts as violators of 
the anti-trust acts, and that has resulted in many a court 
decision declaring them to be unlawful combinations. 
One of the most extensive of this type was the Proprietary 
Drug Pool, brought to light in 1906 in a suit before the 
United States Circuit Court for the Eastern District of 
Pennsylvania.^^ It involved all of the members of (1) 

12 Loder v. Jayne et al, 142 Fed. 1010. 



274 COMBINATION ORGANIZATIONS 

the Proprietary Association of America composed of 90 per 
cent of all manufacturers and proprietors of patent and 
proprietary medicines within the United States; (2) the 
National Wholesale Druggists' Association, an unincorpor- 
ated association composed of about 95 per cent of the 
wholesale druggists of this country; and (3) the National 
Association of Retail Druggists, an unincorporated associa- 
tion, with headquarters at Chicago, composed of local 
associations of retail druggists embracing about 90 per cent 
of those to be found in the cities and towns of the United 
States. The operations of this series of combinations 
united in the form of a pool are succinctly described by the 
court as follows: 

*' The burden of proving the existence of this agreement, 
contract, combination, and conspiracy, and that the de- 
fendants were engaged and took part in it, was upon the 
plaintiff, and for that purpose evidence, which was un- 
contradicted, was offered to prove that the National 
Association of Retail Druggists had its central office in 
Chicago, and received financial support from all the other 
associations and many of the members belonging to them; 
that from this central point organizers were sent out for 
the purpose of bringing the local retail dealers into associa- 
tions, and, as a result, Philadelphia retailers were organized 
into an incorporated association known as the Philadelphia 
Association of Retail Druggists. In accordance with the 
plans suggested by the organizers sent from Chicago, the 
Philadelphia retail druggists working with the organizers 
secured a consensus of opinion of the retailers here from 
which they fixed the minimum rate at which drugs should 
be sold at retail by the retail druggists in Philadelphia and 
vicinity. All the retail dealers were then notified of this 
minimum rate and in case the retailer cut below the price 
so fixed his name with this information, was sent to the 
National Association of Retail Druggists at Chicago, and 



ASSOCIATIONS, FEDERATIONS, ETC. 275 

the secretary, Mr. Wooten, then placed the name of this 
retail druggist upon what was known as an ' aggressive 
cutter's ' list, and this aggressive cutter's list, with his 
name thereon, was sent to all proprietors, members of the 
Proprietary Association of America, and all the whole- 
salers, members of the National Wholesale Druggists' 
Association, with the request that they cease selling any 
drugs whatever to such an aggressive cutter; and it was 
further established, in case any proprietor or wholesaler, 
after receiving this notice from the Secretary of the 
National Association of Retail Druggists, failed to obey 
and cease selling to such an aggressive cutter, this informa- 
tion of his failure to obey also found its way to the secre- 
tary of the National Association of Retail Druggists and 
such disobedient proprietor or wholesaler was disciplined 
by being put on what was designated as a ' pink slip,' and 
his name was sent to all retailers throughout the United 
States with the information that he had been selling to 
aggressive cutters, and the request made to the retailers 
throughout the country to cease making any further pur- 
chases from such delinquent wholesaler or proprietor." 

A similar pool was disclosed through the suit brought 
by the Bobbs-Merrill Company against one of the pro- 
prietors of R. H. Macey and Company of New York City.^^ 
In this case the American Publishers' Association and the 
American Booksellers' Association each representing about 
90 per cent of their respective business fields entered into 
mutual agreements to sell books only at such prices as were 
agreed upon. The court held the agreement to be invalid 
at law. 

Railroads also have used this form of pool to institute 
uniform freight rates- These rate agreements were some 
of the first to be attacked by the government under the 
Sherman Act. The first of these pools was the Trans- 
is Bobbs-Merrill Co. v. Strauss et al, 139 Fed. 155. 



276 COMBINATION ORGANIZATIONS 

Missouri Freight Association, founded in 1889 by some six- 
teen railway companies operating throughout the territory 
lying between the Missouri River and the Pacific Coast. 
The agreement is described as " a contract between railroad 
companies forming the association to establish and main- 
tain such rates, rules and regulations on freight traffic be- 
tween competitive points as a committee of their choosing 
shall recommend as reasonable." It provided for monthly 
meetings composed of one representative of each company. 
These were vested with power to set the rates. Each com- 
pany was required to give five days' notice before a 
monthly meeting if it desired a change of rates. If voted 
down, it was to give ten days' notice before putting its 
notified rate into effect.^* 

The railroad companies in the northeastern part of the 
United States attempted the same type of pooling arrange- 
ment through the Joint Traffic Association which was or- 
ganized in 1896. 

7. Patent Pools. — Companies owning patents under 
which certain commodities were manufactured have fre- 
quently pooled these patents, placing the ownership or 
control of the patents in a corporation which then gave a 
license or right to manufacture under all of the controlled 
patents. Such an organization was the National Harrow 
Company .^^ This company was formed to take over 
patents under which ninety per cent of the spring-tooth 
harrows produced in this country were manufactured. The 
former owners then were given licenses under which they 
might manufacture spring-tooth harrows provided that 
they did not sell their product at lower prices or on more 
favorable terms than were stipulated in the license agree- 
ment. 

14 United States v. Trans-Missouri Freight Association, 85 
Fed. 59. 

15 National Harrow Co v. Hench et al., 83 Fed. 36. 



ASSOCIATIONS, FEDERATIONS, ETC. 277 

The licensees were the sole stockholders of the National 
Harrow Company. The Indiana Manufacturing Company 
was the key unit in a similar pool. This company con- 
trolled twenty-one American and two Canadian patents 
and licensed its stockholders to manufacture pneumatic 
straw stackers and threshing machines under them. It 
also stipulated sale under uniform prices.^^ 

8. Open Price Pools. — This type of a pool is said to be 
the invention of Mr. A. J. Eddy, a Chicago lawyer, who 
defines an open price as " a price that is open and above 
board, that is known both to competitors and customers, 
that is marked wherever practicable in plain figures on 
every article produced, that is accurately printed in every 
price list issued — a price about which there is no secrecy, 
no evasions, no preferences." ^^ He holds that the insta- 
bility and disorganization of business are due to ignorance 
or misinformation as to actual market conditions, cost of 
manufacture and marketing methods, and that cooperation 
accomplished by open prices is the remedy. To this end 
he has been instrumental in causing scores of open price 
associations to be formed. They exist today in the cotton 
textile, woolen, lumber, iron and steel, leather, milling and 
numerous other industries. 

Each member of the association sends to the secretary 
a report covering his sales, prices and terms. These are 
then taken up at the regular meeting, which may be 
monthly or oftener, and deviations from the average are 
fully discussed. In this way it is hoped to convince a 
'' price cutter " of the error of his ways and to bring him 
up to the general average. The associations are cautioned 
against discussion of future prices lest they run counter 
to the Sherman Act. Nevertheless, it has been brought 

16 See Indiana Manufacturing Company v. J. I. Case Threshing 
Machine Co., 148 Fed. 21. 

17 A. J. Eddy: The New Competition, p. 110. 



278 COMBINATION ORGANIZATIONS 

out through court cases and hearings before legislative 
committees,^® that the urge to agree on future prices and 
to cause the average to creep up through one means or an- 
other is too strong to be resisted. Such for example, 
was the case with the Yellow Pine Association, the 
Steel Erectors' Association and the Portland Cement 
Association.^^ 

The famous " Gary Dinners " of the members of the 
American Iron and Steel Institute constituted a similar 
type of pool. The steel masters would meet at dinner at 
the invitation of Judge Gary, usually in New York City, 
and there they would discuss prices and conditions of busi- 
ness in the steel industry. It was considered to be a viola- 
tion of a gentleman's word of honor, should he digress in 
any way from the prices and percentage of capacity of 
production considered to be most desirable for the welfare 
of the industry. Everything that was said at these meet- 
ings was usually given out to the press for publication. 
The plan was abandoned when it became apparent that 
the courts considered it to be in violation of the Sherman 
Act.-« 

The Kartell or Syndicate 

The kartell or syndicate, is the European counterpart 
of the American pool. It is essentially a combination of 
the federation type formed by agreement between autono- 
mous establishments that delegate to the kartell control 
over certain aspects of their business. Such agreements 
have the sanction of the law, by virtue of which they are 

18 See reports of the Lockwood Committee of New York State 
Legislature, 1920-21. 

19 In the case of American Column & Lumber Co., et al. v. 
United States, decided at the October Term (1921) of the Supreme 
Court, it was held that the open price association is a combination 
in restraint of trade under the Sherman Act. 

2 For an account of what took place at these dinners see 
Stevens, Industrial Combinations and Trusts. 



ASSOCIATIONS, FEDERATIONS, ETC. 279 

made enforceable in the courts like any other valid con- 
tract, regardless of their monopolistic character. In this 
particular they differ from the American pool which, if it 
can be shown to be monopolistic or even in restraint of 
trade, is unlawful and hence unenforceable at law. They 
are further strengthened by the fact that the governments 
of such countries as Belgium, Germany, Sweden, Switzer- 
land and others, encourage their formation, and frequently 
even themselves become members. The life-term of these 
agreements is most frequently five or ten years, at the ex- 
piration of which it becomes necessary to negotiate a new 
contract. 

The purpose of kartells is to bring about a closer cor- 
relation between the supply of, and the demand for, a given 
commodity. For this reason they are usually built up 
about a particular article of commerce. Thus, prior to the 
formation of the German Steel Syndicate (Stahlwerksver- 
band) the steel plants were members of several different 
kartells concurrently, embracing, for example, rails, struc- 
tural steel and billets, respectively. Beside these there 
existed at times kartells for heavy sheets, light sheets, wire 
and other commodities. In the glass industry there are 
kartells for bottles, mirror glass, and other such special 
articles. 

The greatest obstacle standing in the way of kartelliza- 
tion is special interest. The combining units are not 
always all in the same stage of technical development. 
In almost every branch of production isolated establish- 
ments that produce but a single commodity will be found 
to exist side by side with those that have integrated to 
such a degree that they have extended the variety of their 
products almost to the limit. Even today one still finds 
in the steel industry unit blast furnaces, sheet mills, hoop 
band plants and rod mills, even though this is one of the 
most highly integrated industries. Where such conditions 



280 COMBINATION ORGANIZATIONS 

persist the problem of reconciling the peculiar interests of 
some with the general interest of all is one that all but 
defies solution. 

In view of these obstacles, Dr. Heinrich Mannstaedt^^ 
lays down the following rules governing the formation of 
kartells: If the kartell is to be built up about a given ar- 
ticle, this article will be the more susceptible to kartelliza- 
tion the less of individual peculiarities it possesses, and the 
more closely it corresponds to the products of other estab- 
lishments. From this it follows that kartells can be 
formed most easily in those branches of production in 
which competition is keenest and where the law of mass 
production is most freely applicable. Because of the wide- 
spread use of automatic or semi-automatic machinery in 
the lower stages of production, these must suffer most from 
over-production and are ready candidates for kartellization. 
In contrast to them, those branches of industry, like machine 
manufacture, the products of which possess great indi- 
viduality, making them less susceptible to irregularity of 
production, are not easily kartellized. Under such condi- 
tions the kartell must be organized about a single commod- 
ity selected from the general mass of products. 

Types of Kartells. — According to the same economist, 
a study of German kartells shows that four methods are 
commonly employed to make them effective. A single 
kartell, however, may use two or more of them at the same 
time. As the following brief description will show, they 
differ little from the methods used by our own pools. 

(1) Agreement on sales price and conditions of sale was 
common among the earlier kartells and is frequently used 
even at the present time. But it has not proved very 
successful, since it provides no means whereby production 
may be curtailed to prevent an over- supply. For this 

21 Heinrich Mannstaedt, Ursachen und Ziele des Zusammen- 
schlusses im Gewerbe. 



ASSOCIATIONS, FEDERATIONS, ETC. 281 

reason they usually break up when a general slump in 
prices sets in. However, there are exceptions, notably the 
Upper Silesian Coal Syndicate which enjoyed a continuous 
existence for more than twenty-five years- This may be 
accounted for in part by the fact that it embraced only 
coal that was shipped by rail or water out of the district, 
exempting such as was needed to supply the local indus- 
tries. Besides, the number of members was small, includ- 
ing but fifteen mines, all of which produced a very uniform 
commodity under approximately identical conditions. In 
other districts of Germany, as for instance in the Rhine- 
land and Westphalia, where great variations exist not only 
in the method of mining but also in the quality of product, 
the pure price and conditions kartells have seldom con- 
tinued for a long period of years. 

(2) Territorial division of markets has in many cases 
supplanted, and in others supplemented the above method. 
Under this method, if the producing establishments are 
large, each has a monopoly over a given territory; and if 
they are relatively numerous and small a given territory is 
usually assigned to a group of them. In the latter case it 
is customary for each group to draw up a supplementary 
agreement to govern the operations of its several members. 
The market area is ordinarily delimited by freight charges. 

(3) Pooling aj "profits has also been tried with some suc- 
cess. To make this operative two prices are agreed upon, 
namely a basic price and a minimum sales price. The 
basic price approximates the cost of production and may 
vary from establishment to establishment. Each member 
then pays into the kartells' treasury the difference between 
his assigned basic price and the minimum sales price. 
The latter price is not made obligatory upon the members 
who may sell their product for more or less, but it serves 
merely to measure the amount that must be turned over 
to the kartell. This sum is then periodically distributed 



282 COMBINATION ORGANIZATIONS 

among them according to their production. The chief 
advantage of the plan is said to come from stimulating 
improvements in technique by which the members seek to 
force their production costs below the basic price- For 
this reason this method is generally used to supplement and 
round out the kartells that are based primarily on the 
other methods. 

(4) Restrictions on production have figured prominently 
in the formation of the more recent kartells. In general, 
these kartells employ one of two practices; they either cut 
down the working time or fix a maximum output that is 
to be pro-rated among the several members. Where the 
time factor is used as a base it is applied in some such way 
as reducing the mmiber of hours in the work day, reducing 
the number of work days per week or limiting the number 
of hours per day per week during which the machinery used 
to produce the article may be operated. Where the maxi- 
mum output method is used the total out-put is arrived at 
from the standpoint of the market demand. Each member 
is then allotted a quota based either on previous actual 
production, or on capacity for production. The first of 
these methods is not as effective as the second because it 
tends to bring about a greater intensity of production 
which may result in a failure to reduce the total quantity 
produced. On the other hand, the second method also has 
its difficulties. It is easy enough to reduce the total output 
and in this way the quota of each member, for the latter is 
usually a percentage of the total. Nevertheless, there is 
constant friction because the plan makes little or no allow- 
ance for improved methods of production and technical 
efficiency. And whenever the kartell agreement comes up 
for revision or renewal, there is always a fierce fight for 
readjustment of quotas. In the coal industry this demand 
for larger quotas on the part of the larger, more efficient 
mines has caused many of them to buy out their smaller 



ASSOCIATIONS, FEDERATIONS, ETC. 283 

and less efficient competitors in order that they might add 
the quotas for the latter to their own. 

Where integrated establishments become members of 
this type of kartell they usually demand that raw ma- 
terials, which they work up themselves, shall be included 
in the agreement only to the amoimt of the surplus which 
they do not use. Dr. Mannstaedt,^^ for example, states 
that certain mixed steel works became members of the pig 
iron syndicate formed for export purposes in 1879, by the 
producers of Lothringen and Luxemberg. Under the 
agreement, they were permitted upon due notice to the 
syndicate to withdraw the pig iron that they themselves 
used. During the period of business activity that began 
in the decade, 1890-1900, it chanced that these steel works 
were late in notifying the syndicate of the amount of pig 
iron that they required for their own use. When the notice 
did come, they were advised that the syndicate had already 
contracted to sell this quantity to foreign buyers. Thus, 
in the face of their own pressing need, these plants were 
obliged to deliver their iron to the kartell. The outcome 
of this was that the steel works demanded a change in the 
agreement when negotiations for renewal of the syndi- 
cate were begun in 1900. They desired to remain 
active members of the syndicate without having 
definite quotas assigned to them, but wanted also the 
right to turn their surplus over to the syndicate for 
sale. The only obligation they wished to assume 
was not to sell any pig iron except through the 
syndicate. These proposals were unacceptable to the pure 
blast furnaces. Finally, it was agreed that the steel works 
should participate in the syndicate only to a predetermined 
amount of their total production, exempting what they 
needed for their own use. They also were given the privi- 
lege of withdrawing portions of their quotas from syndicate 
control by the other members. 

22 Ibid. 



284 COMBINATION ORGANIZATIONS 

In the Westphalian Coal Syndicate the integrated mem- 
bers profited at the expense of the unintegrated. During 
the industrial depression of the early nineties the demand 
for coal dropped enormously while the syndicate refused 
to reduce prices correspondingly. The small mines were 
hard hit, while those that used their own coal in their 
accessory undertakings were able to mine at somewhere 
near capacity by concentrating on the manufacture of non- 
kartellized products which they disposed of abroad at cut 
prices. 

Integration by Kartells. — Under modern industrial 
organization horizontal combinations of producers of a 
given commodity find that control over production alone 
does not suffice to stabilize the market. Consequently 
they reach out to control also its distribution, because 
competition between distributors may be almost as up- 
setting to market prices as competition between the pro- 
ducers themselves. We have already seen how some of our 
pools, notably that controlling the manufacture and sale 
of patent medicines followed this practice. The same con- 
dition is found to exist in the larger kartells such as the 
Rheinisch-Westfalische Kolensyndikat and the Stahlwerks- 
verband. 

The above named Westphalian Coal Syndicate has bind- 
ing agreements with wholesalers whereby the latter pledge 
themselves to place with it orders of uniform size at more 
or less regular intervals. In order to reduce competition 
between these wholesalers as far as possible, the syndicate 
divided its territorial market into 29 districts, and not only 
assigned a given district to certain of these wholesalers, 
but even allotted to them the disposal of certain of its 
producing members. But, because a few dealers did not 
come in on these agreements, the wholesalers of the Kassel 
District, with aid of the syndicate, in 1896 formed a limited 
company under the name " GlUckauf." The others soon 



ASSOCIATIONS, FEDERATIONS, ETC. 285 

followed, and by 1912 there were ten such coal selling com- 
panies cooperating with the syndicate- They are more or 
less under the control of the syndicate, which, however, 
pledged itself to sell its coal only to them within their 
assigned districts. The former independent dealers 
pledged themselves not to set up new coal selling establish- 
ments. They participated in the business of the companies 
in the same proportion that the sale of coal of each bore 
to the total sold by all, and the profits were distributed on 
the same plan. The conditions of sale under which the 
companies were to sell their coal were brought into close 
correlation with those of the syndicate. In several cities the 
coal retailers followed the example of the wholesalers by 
organizing similar companies. 

Another feature of the organization of this kartell con- 
sists of the Rheinische-Kolenhandels- und Reedereigesell- 
schaft,^^ commonly called the " Kolenkontor." This com- 
pany was formed in 1904 to stabilize prices and control 
shipments of coal by water on the Rhine and by rail to 
South Germany, Switzerland and parts of Austria. Ocean 
shipments and those reshipped to Belgium and France were 
not included. The membership of the " Kontor," in addi- 
tion to the Syndicate, included the four " Reederzechen," 
that is to say, Franz Haniel & Company, Mathias 
Stinnes, Hugo Stinnes, and the Bergbau- und Schiffahrts- 
Aktiengeselschaft, which own the transport facilities 
jointly. These four concerns, however, participate in the 
Syndicate only to the extent of the coal handled. 

Distribution of Kartell Organizations. — Continental 
Europe is the home of the kartell, for there it enjoys the 
full protection of the law. But even so, it has attained a 
prominent place largely only in those countries where the 
influence of the German industrial organization is strong. 

23 The name Reederei is used to designate a partnership or com- 
pany engaged in owning and operating inland or coastwise vessels 
with or without the necessary dock facilities. 



286 COMBINATION ORGANIZATIONS 

Thus we find a great many of them in Switzerland, Hol- 
land, Belgium, Sweden, Denmark, Austria, Czecho-Slovakia 
and Hungary and also some in Italy. However, in Ger- 
many they appear to have been, and to large extent still 
are, the favorite form of organization. According to the 
government reports, there were in that country, in 1916, 
over 500 kartells exclusive of the loose organizations 
effected through factors' agreements. Most of them are 
highly centralized organizations that place considerable 
power of control in the hands of the kartell. 

Although kartells and pools have not been unknown in 
England in the coal, iron, cement, porcelain, wall-paper, 
textile and chemical industries, these generally have been 
very loose price and production kartells of a temporary 
nature. The relative absence of kartells in England is 
ascribed, by Professor Liefmann, in his monograph on 
Kartells and Trusts, to (1) the stringency of laws against 
organizations and combinations in restraint of trade; (2) 
the individualistic conception of enterprise based upon the 
English economic teachings that free competition is the 
natural economic condition; (3) the effect of free trade, 
making it almost impossible to have a higher price at home 
than abroad; and (4) geographic conditions that make it 
easy for foreign competition to reach nearly all parts of 
the United Kingdom, and also make the establishment of 
definitely circumscribed markets very difficult. 

Effect of Federation Organizations upon 
Industry 

Federation organizations are by no means an unmixed 
blessing to the industry in which they occur. There are 
certain outstanding advantages as well as disadvantages 
attendant upon their use. But on the whole it may be said 
that the advantages predominate — a fact that is clearly 



ASSOCIATIONS, FEDERATIONS, ETC. 287 

brought out by a brief consideration of both sides of the 
question. 

Advantages. — The possibility of exercising a direct in- 
fluence upon the establishment of an artificial price and 
the relative freedom from the exasperating fluctuations in 
business that are brought on by the unimpeded play of the 
laws of supply and demand, are perhaps the most im- 
portant advantages that federation organizations have to 
offer their members. The members are thus in a position 
to take advantage of a period of growing business activity 
to effect a steady and gradual increase in prices without 
the necessity of continually keeping an eye on the action 
of competition. Also, during periods of business depres- 
sion, which are usually accompanied by a rapid fall in 
prices, the federation is able to retard the rapidity of decline 
and, in a measure, to prevent the laying off of large quan- 
tities of labor by shortening hours or reducing the number 
of work days per week. The greater uniformity in prices 
and closer correlation between supply and demand also 
lessen the capital risk, thus drawing new capital into the 
industry. For the same reason pools and kartells, where 
they are more or less permanent, have a tendency to force 
up the price of the securities of member companies. 
Furthermore, the members can benefit materially through 
federation agreements covering terms of sale, methods of 
payment, rebates, extension of credit, charges for packing, 
etc. Such standardization can become a lasting social and 
economic benefit to the community at large as well as the 
industry about which the federation centers. 

Disadvantages. — By entering a federation organization 
the individual enterprise must necessarily sacrifice some of 
its independence and disclose many of its business methods 
to its competitors- But on the other hand, this sacrifice 
of independence does not go far enough in certain direc- 
tions. During periods of prosperity the members of the 



288 COMBINATION ORGANIZATIONS 

kartell or pool usually have a free hand in carrying out 
extensions to their establishments in order to increase their 
productive capacity. And even in periods of depression 
they frequently do the same thing so that they may be in a 
position to take full advantage of the market when busi- 
ness picks up. The natural result is that the combine finds 
itself unable to dispose of the product forced upon it and 
dissolves, throwing the members back upon a competitive 
basis, in a worse condition than they were before. Of still 
greater disadvantage is the growth of independent estab- 
lishments of a like character. These, where they can 
maintain themselves, can take advantage of the combine's 
high prices by barely under-bidding it, while they remain 
free from the limitations and restrictions imposed upon the 
members. Unless a monopoly over the product is se- 
cured, there is no way in which the rise of such independents 
can legitimately be controlled. Consequently, the federa- 
tion stoops to the use of all kinds of questionable and illegal 
methods to suppress this new competitor or is forced to 
take him into the fold. 

Another disadvantage, more particularly from the em- 
ployer's point of view, but not necessarily from the social 
side, is the marshalling of employees as a body against 
the members of the federation. Naturally, when the 
establishments in an industry have combined to form a 
strong pool or a kartell, each member is less free to handle 
his own labor problem. The employees, realizing this fact, 
take advantage of the situation to bring pressure to bear 
not alone on the combination, but through it upon its in- 
dividual members. In the end, the employees will make 
their demands upon the industry as a whole rather than 
Upon individual employers. The more or less direct effect 
upon the workers is to bring about a greater uniformity 
in wages and working conditions as well as a greater regu- 
larity of work. The benefits that may thus accrue to 



ASSOCIATIONS, FEDERATIONS, ETC. 289 

labor through well regulated combinations of this type 
must not be overlooked. On the other hand, the control 
company and trust, when at the head of fully integrated 
industries, are in a position to dictate to their employees 
and to carry on a labor war with much greater effective- 
ness than the federation. 



CHAPTER XV 

SUBSTITUTION OF SECURITIES: INVESTMENT COMPANIES 

Where the outstanding securities of one or more com- 
panies are acquired from the holders thereof by another 
company that gives its own securities in exchange, thus 
substituting a new medium through which the income de- 
rived from the underlying capital is to be distributed, 
there is an application of the principle of substitution of 
securities. The types of ownership organizations through 
which this may be accomplished must, quite obviously, be 
securities-issuing organizations that are empowered to 
hold the securities of other business organizations. Of 
these, the holding corporation is the outstanding favorite, 
though the holding trust is also extensively used. The joint 
stock company, due to its lack of distinct legal entity, is 
ill adapted to the principle, and in consequence it is seldom 
employed. 

The direct effect of an application of the principle of 
substitution of securities by ownership organizations that 
enjoy legal entity, is very complex. Simply stated, it 
results in a combination of the claims to income accruing 
to the invested capital underlying the securities, and of 
the claims to a porportionate share of the capital itself; 
and there is inherent in it the possibility of complete cen- 
tralization of control over the enterprises concerned. In 
other words, it substitutes, as claimant, a single legal en- 
tity in place of the former security holders and vests that 
entity with all of their rights, powers and privileges as 

290 



SUBSTITUTION OF SECURITIES 291 

holders of ownership or creditor securities. But these 
rights, powers and privileges are in turn indirectly trans- 
mitted to the holders of the securities that the holding 
organization issues. A simple illustration will serve to 
make these points clear. 

A holding company D acquires the securities of corpora- 
tions A, B and C from their stockholders, who receive cor- 
poration D's securities instead. The holding company's 
assets now are the securities of corporations A, B and C, 
but they are in turn supported by the capital investments 
of these three subsidiaries. The income accruing to this 
capital still goes directly to the subsidiaries which, how- 
ever, transmit it to the holding company in proportion 
to its holdings of A, B and C stocks. Then, this company 
in turn redistributes it among its own stockholders. These 
stockholders, who have exchanged their A, B and C stocks 
for D stock, now have, in the final analysis, three sources 
of income, where formerly, each group — A stockholders, 
B stockholders and C stockholders — had each but a 
single source of income. Thus, any differences in the divi- 
dend-paying ability of the three original companies have 
been averaged up through the medium of substitution of 
securities. The claim of the stockholders to the capital of 
the enterprises involved has undergone a similar change. 
Their first claim is on the securities capital of the holding 
company, and through this the claim reverts to the business 
capital of the subsidiaries. Their control over the hold- 
ing company gives them in like manner control over the 
subsidiaries; for the holding company owns the majority 
of the stock of companies A, B and C and, therefore, con- 
trols them. 

Turning from the economic to the legal results, the first 
thing that strikes the mind is that the legal entity, or be- 
ing of the subsidiaries has not been destroyed, and that 
a new legal entity, the holding company, has been created. 



292 COMBINATION ORGANIZATIONS 

Each one of these legal entities must have its own capital 
assets. Each of the subsidiaries owns its own plant 
and equipment in its own name — in other words, each 
has a legal title in a definite accumulation of economic 
capital — assuming of course that they are primary or 
operating companies. The holding company's assets are 
the securities of its subsidiaries. To these only does it 
have the legal title. But as a stockholder in each of the 
subsidiaries it enjoys all of the rights and powers embodied 
in that relation, including a claim on the basic capital. 

We may, then, restate the results of the process of securi- 
ties-substitution to be: 

1. The continuance of legal title to definite accumulations of 

basic underlying capital in legally independent ownership 
entities. 

2. The combination, either in whole or in part, of such accumu- 

lations of capital into an economic business unit. 

3. The legal unification of proportionate claims to income ac- 

cruing to such capital and 

4. The possibility of a centralized, unified, control over it. 

Participation as an Application of the Principle of 
Substitution. — That there is more than one use that may 
be made of the principle of substitution of securities has 
already been indicated in the preceding paragraph. In the 
first place, it may be employed to create a more or less 
permanent relation between the several companies in- 
volved, so that the holding company becomes a participant 
in the enterprises conducted by the companies whose securi- 
ties it holds. In the second place, the arrangement may be 
characterized by its temporary nature, being employed 
merely to facilitate the accumulation of sufficient capital 
by the companies whose securities are held, the ultimate 
aim of the holding company being to sell these securities 
finally to permanent investors. In such cases the holding 



SUBSTITUTION OF SECURITIES 293 

company does not aim to become a participant in the enter- 
prises of the other companies, but renders them a service 
by furnishing the money capital to be converted into busi- 
ness capital, namely, it finances them. These two uses of 
the securities-substitution principle may thus be said to 
give rise to two classes of holding companies, namely; (1) 
participation companies and (2) finance companies. 

Kinds of Participation. — Participation through substi- 
tution of securities may be either partial or complete; and 
it may arise merely out of a voluntary desire, or out of 
economic or legal necessity. Present day practices present 
three distinct applications of the participation principle, 
each of which gives rise to specialized companies through 
which they are brought into use. 

A. The first use of participation is to minimize as much 
as possible the speculative features that characterize most 
securities and in this way to widen the market for them 
by making them appeal to small investors. A particular 
issue of securities may have a high rate of return; another, 
a low rate ; a third, may exhibit irregular fluctuations, while 
still a fourth gives a regular, stable, income to the holder. 
By combining the earnings of a large number of various 
types and kinds of securities the varying rates of return 
from individual units may be averaged, the high interest 
and dividend rates counterbalancing the low. A wealthy 
capitalist is in a position to apply this law of averages 
for himself to his investments in securities; but a small in- 
vestor is in no position to do so. He must take a chance 
unless some other agency applies it for him. This may 
be accomplished through participation by substitution of 
securities. For instance, a holding company may issue its 
own securities to investors and use the funds received from 
them to purchase a great variety of securities in the mar- 
ket, or to purchase them directly from the issuing organiza- 
tions. It then derives its income from the large number of 



294 COMBINATION ORGANIZATIONS 

enterprises whose securities it holds and transmits it to 
the holders of its own securities in averaged form. Such a 
procedure is an application of the investment principle to 
securities capital, and the holding companies performing 
this function may very properly be called investment 
companies. 

B. The second use of the participation principle arises 
out of a desire to establish a unified control over one or 
more securities-issuing organizations through the ac- 
quisition by the holding company of all or a majority of 
their voting stocks. In operations of this kind there is 
naturally a tendency to make the participation as complete 
as possible, giving it more the character of true owner- 
ship. In the United States, this is the chief purpose for 
which the security-holding power has generally been re- 
quested. For this reason the name " holding company " 
has come into general use to designate participation organi- 
zations of this type. However, in order to distinguish them 
clearly from the other types of holding companies, they 
will here be called control companies. Where the partici- 
pation of the control company in other companies is only 
little more than a majority control, the latter are usually 
designated as controlled companies; and where it is com- 
plete or very nearly so, they are known as proprietary 
companies. 

C. The third use arises out of the existence in certain in- 
dustries of economic or legal conditions that make it imprac- 
tical to issue the securities of operating companies directly 
to the public. In order to effect the " securitization " 
of capital invested in such undertakings, it becomes neces- 
sary to interpose between the final investor and the organi- 
zation directly conducting the enterprise a secondary securi- 
ties-issuing company that can assume, as its permanent 
business capital, the securities of the operating concerns. 
To this type of participation company is given the name, 
assumption company. 



SUBSTITUTION OF SECURITIES 295 

Commenting upon the occurence of these three types of 
participation companies and their distribution throughout 
the world, Professor Robert Liefmann/ a recognized 
authority on the subject, says: " It is noteworthy that, 
today, in each of the great commercial and industrial coun- 
tries some one of these three types of companies is con- 
spicuously prominent. England is the land of the invest- 
ment trusts and investment companies. In America, 
control of other undertakings is almost exclusively the 
purpose for which the substitution of securities is employed. 
In G^rnaany the securities-assumption companies have 
attained a prominence that far surpasses any that organ- 
izations for the accomplishment of like ends in other coun- 
tries exhibit. But any single one of these three types of 
participation companies is not to be found exclusively in 
its respective country. There are in England also some 
control companies; in America also some investment com- 
panies, though they emanate chiefly from England, and 
also a few securities-assumption companies; in Germany 
also a few control companies. But of the three types de- 
scribed, each one is, respectively, predominant in some one 
of the three countries, so that each type may be regarded as 
characteristic of a given country. Of other states where 
securitization of capital has developed, Fmnce has a num- 
ber of investment companies, and the principle of securi- 
ties-assimiption also has attained some development. Bel- 
gium, to the contrary, has followed the German example 
and has a larger number of assumption companies because 
it has developed just that particular field for capital in- 
vestment in which the system of assumption companies 
plays the chief role (electric light and power establish- 
ments) . Holland, as an interest receiving state, follows the 
French plan and has a number of investment companies. 

1 R. Liefmann, Beteiligungs- und Finanzierungsgesellschajten, 
Sec. Ed. 1916, pp. 78-79 (Translation by the author). 



296 COMBINATION ORGANIZATIONS 

In Switzerland, chiefly as a result of outside influence, a 
whole array of investment and assumption companies have 
been formed. In all other countries, the principle of substi- 
tution of securities has at times been used in one or another 
of its several different forms, but these have not as yet 
attained a sufficiently advanced industrial development to 
permit of ascribing to them, with any degree of certainty, 
any marked tendency of development in one or another 
direction." 

It is quite apparent that a participation company need 
not confine its activities to any one of these three uses to 
the exclusion of the others. Indeed, it is very common to 
find a single company performing two and sometimes even 
all three of these services. Nevertheless, there are a large 
number of companies that are distinctly representative of 
these several types. A brief description of some of these 
companies will serve to illustrate the practical use made of 
them. 

Investment Companies 

England is the great home of investment companies. 
They have been in use in that country since 1868. From 
that time on they increased slowly in number for about two 
decades. In 1888, however, began a period of very rapid 
growth that was checked only by the advent of the crisis 
of 1892. Since 1897, they have again become prominent 
features of the English business world, and in 1911 there 
were over 125 of them listed. Their adoption by other 
countries has been rather limited, with the possible excep- 
tion of France, where they are fairly common. 

English Investment Companies. — A study of the ex- 
tent and kinds of holdings of English investment companies 
leads one to the conclusion that there are two general 
classes, namely; (1) those that carry on a general invest- 
ment business by purchasing securities of enterprises 
engaged in many industrial and commercial fields; 



INVESTMENT COMPANIES 297 

and (2) those that confine their holdings to particular 
industries, and sometimes even to particular localities. 
The latter class seems to be the general favorite, invading 
such industrial fields as railways, mining, colonial explora- 
tion and development projects, petroleum, tea, rubber, 
nitrate, wireless telegraph undertakings and ocean 
transportation. 

Another characteristic of British investment companies is 
the extensive use made of the securities-issuing trust as 
the holding organization in which the title to the securities 
acquired is vested. They are in far more common use 
for this purpose than any other form of ownership 
organization. 

Among the English companies that carry on a general 
investment business there are a number of excellent ex- 
amples. The Stock Conversion and Investment Company, 
founded in 1889 with a capital of £857,000, to convert exist- 
ing securities into several new classes, gave in exchange for 
a block of London and Northwestern Ordinary Shares three 
different kinds of stocks and bonds, and for a block of 
North Eastern Railway Consols two new classes of stocks. 
The company does not confine its activities exclusively to 
holding railway securities, but has also entered other 
fields. Other companies of this type are the United States 
and South American Investment Trust Company, founded 
1886, with a capital of £1,325,000; the Foreign American 
and General Investment Trust Company, 1883, with a paid- 
in capital of £2,000,000; the Merchants Trust, Ltd., 1889, 
with a capital of £2,100,000 and the North American Trust 
Company, 1896, with a capital of £2,000,000. There is in 
the trust agreement of the last named company a provision 
that not more than ten per cent of its capital may be in- 
vested in any single issue of securities. A similar limita- 
tion is found in the Industrial and General Trust, founded 
in 1889, with a capital of £1,325,000. The trustees of this 



298 COMBINATION ORGANIZATIONS 

company may not invest over three per cent of its capital in 
a single undertaking. The New African Company, 1894, 
with a capital of £283,000 is another good example of this 
type. It acquired the securities of seven undertakings in- 
cluding shares of the Marconi Wireless Telegraph Company 
and several railway, land and mining companies. The Cale- 
donian Trust Company, 1910, with a capital of £811,000 to 
be invested in American securities, may not put more than 
20 per cent of its capital in a single enterprise. 

British investment companies that specialize in the se- 
curities of particular industries or regions are more numer- 
ous than the general type. Among those that specialize 
in mining securities are the Johannesburg Gold Fields, 
founded in 1889, with a capital of £162,000; the Oceana 
Development Company, that owns securities of the Balkis, 
New Charterland Exploration Company, the Van Ryn 
Mines and other enterprises of the South African Rand 
District; the Rhodesian Mines Trust, and the Diamond 
Mining Investment Company which owns diamond mine 
and oil securities. Most of these companies were founded 
since 1890. The shipping industry is represented by the 
Scottish Ship & Ship Share Investment Company, organized 
1893 with a capital of £13,970. In the public utilities field 
is the American & British Securities Company with a capi- 
tal of £180,000. The rapid development of rubber planta- 
tions in the East Indies has also given rise to a considerable 
number of investment companies such as the Rubber Share 
Trust & Finance Company with a capital of £350,000; the 
Anglo-Malay Investment Trust, £135,000, and the British 
North Borneo Rubber Trust with £1,000,000 capital. These 
companies, however, do not confine their activities entirely 
to investment but also promote rubber plantation undertak- 
ings. Regional investment companies are represented by the 
American Trust Company founded in 1902 with £1,769,000 
capital and the African Trust, Ltd., 1905, with £200,000 



INVESTMENT COMPANIES 299 

capital. The latter holds securities of the Consolidated 
Rand Mines, Rhodesia Trust & General Exploration Com- 
pany, East Africa Pearl & Sponge Company and others. 

American Investment Companies. — In the United 
States there are few securities-issuing organizations that 
might be called pure investment companies. It has been 
the practice in this country to emphasize the control rather 
than the investment function, but the latter service is fre- 
quently combined with the former. This is conspicuously 
true of our railroad companies. For example, the Union 
Pacific Railroad Company operates 3,614 miles of railway 
in its own name, controls through two owned companies 
some 4,418 additional miles, and participates in the earn- 
ings of about 100,000 miles of railways owned and operated 
by most of the big railroad companies in the country. 
Among these companies, whose securities it holds as in- 
vestments,' appear the Pennsylvania Railroad, New York 
Central, Baltimore & Ohio, Chicago & Alton, Chicago & 
Northwestern, Great Northern, Chesapeake & Ohio, and 
Chicago & Milwaukee and St. Paul. The value assigned to 
the securities of these roads held by the Union Pacific, in 
1919, was $90,445, 272 in stocks and $109,864,809 in bonds, 
which added to its $16,362,050 of United States Liberty 
bonds, makes a grand total of $216,672,131 in investment 
securities. This sum was about one seventh of its total in- 
vested capital. It is at once clear that this railroad com- 
pany performs the investment function on a much more 
gigantic scale than the simple investment companies of 
Britain. Nor is this railroad an exceptional case, for prac- 
tically all of the railroad companies mentioned in this para- 
graph have extensive holdings in other companies for in- 
vestment purposes. 

The pure investment company, however, also has made 
its appearance in the United States since about 1905. For 
instance the City Invesj^ing Company was formed in New 



300 COMBINATION ORGANIZATIONS 

York in 1905 with a capital of $5,000,000 to deal in real 
estate and to carry on a general investment business. It 
now holds large blocks of bonds, mortgages and stocks. 
The Federal Utilities, Incorporated, was chartered in 1911 
under the laws of Virginia to hold stocks and bonds and 
other securities and properties of electric light and power 
and other public utilities. The original capital of 
$1,000,000 was paid in in cash and this was used to acquire 
securities primarily for investment purposes. The Chicago 
Securities Company was incorporated under the laws of 
Delaware in 1912 with an authorized capital of $800,000 
to take over first mortgages on real estate and United 
States bonds and other securities. 

Several large investment companies sprang up as a re- 
sult of the World War. The American Foreign Securi- 
ties Company was incorporated in 1916 in Delaware with 
an authorized capital of $10,000,000. It then received 
from the French Government $120,000,000 in various kinds 
of securities as security for a loan of $100,000,000, which 
the company itself procured by issuing $94,500,000 of its 
own three-year, five per cent, gold notes. A similar company 
is the Foreign Bond & Share Corporation organized under 
the laws of Delaware in 1919. This company combines 
the investment and financing functions. It is identified 
with a number of American private banking houses, and 
finances government and private undertakings in Central 
and South America and the Far East, While it is primarily 
a finance company, it nevertheless has large investments in 
securities which serve as basic capital for the securities 
that the company itself issues to the investing public. Its 
capital stock consists of 3,000 shares of no par value and 
$10,000,000 of par value common. 

Another company, very similar to the latter, is the Ameri- 
can International Corporation, organized in 1915 under the 
laws of New York primarily to promote American foreign 



INVESTMENT COMPANIES 301 

trade. Its activities up to 1920, however, have been largely 
confined to investments in more or less speculative securi- 
ties. It has large blocks of the International Mercantile 
Marine Company, the United Fruit Company, the United 
States Rubber Company, the New York Shipbuilding Cor- 
poration, the Pacific Mail Steam Ship Company, and the 
Simms Petroleum Company. The authorized capital stock 
— following English practice of issuing founders' shares to 
the managers — is divided into $1,000,000 of "Managers' 
shares " which are 7 per cent, limited participating pre- 
ferred stock and $49,000,000 common stock. 

However, the number of pure investment companies in 
the United States is exceedingly small in comparison with 
those in Great Britain. Neither among the several hundred 
thousand corporations nor among the numerous New Eng- 
land trusts do we find more than perhaps a score. Indeed, 
with us, investment appears to be a consideration secondary 
to control and assumption as ends sought to be accom- 
plished through participation by means of substitution of 
securities. For the most part, the holding of securities for 
investment purposes in this country has been undertaken 
by the great insurance and trust companies. Several states, 
notably New York, 1906, passed laws requiring insurance 
companies to dispose of some classes of stocks, but the 
time limit set for this has several times been extended, and 
in 1920, these companies still held nearly $150,000,000 in 
such stocks- Private banks also hold very large quantities 
of securities, but only in small part as pure investments. 
The federal banks, too, perform the same function to a 
less degree and indirectly in so far as they accept stocks 
and bonds as security for loans. « 

Investment Companies in Other Countries. — In con- 
tinental Europe the investment company is also to be 
found; but it is chiefly restricted to France and Holland. 
In Belgium there are a few finance companies that assume 



302 COMBINATION ORGANIZATIONS 

the investment function as a side line, represented by such 
banking companies as the Societe generale de Belgique and 
the Banque Beige .de chemins de fer. Those in Germany 
are inconsequential. 

'' Criticism. — In theory, the investment company is in a 
position to render a valuable service to small investors by 
eliminating excessive risk from investment in securities; 
but in practice this theory seldom works out in such a way 
as to be entirely satisfactory. This is due, not to any 
inherent weakness of the investment priciple, but merely 
to the fact that any type of ownership organization in busi- 
ness must be run by man, who is not infallible in his 
judgment of the future value of business undertakings. 
Another weakness militating against proper insurance of 
small investors who buy securities of investment companies 
lies in the fact that these companies are private under- 
takings usually operated by those who manage them, and 
who look first to their own private profit. This feature is 
emphasized by the extensive use of founders and managers 
shares which are usually held by those persons who were 
particularly interested in promoting such companies. Their 
stock is frequently guaranteed by a first claim to a fixed 
rate of dividend and on assets with right to share liberally 
in extra profits. This prospect of extra profit and security 
has led many managers of investment companies to put 
the capital into speculative securities, which as frequently 
as not prove unprofitable. For these reasons it is open to 
serious doubt whether the investment company really does 
render a service to modern industry that can not as well 
be left to the individual investor. The latter is no better 
equipped to ascertain the value and stability of the securi- 
ties isssued by investment companies than of those issued 
by operating concerns. It wo\ild, in most cases, be much 
safer for him to invest in the stocks of the big, firmly estab- 
lished industrials and railways, or in government bonds. 



CHAPTER XVI 
PRINCIPLES OF CONTROL 

The Instrumentalities of Control 

Control over one ownership organization by another, 
while both retain their separate entities, is defined in a 
special report of the Interstate Commerce Commission ^ as 
ability to* determine the action of the organization. In 
explaining what constitutes ability to determine action, 
the report proceeds to enumerate eight conditions, the 
existence of which in the relations between two or more 
organizations is evidence of control. These may be re- 
classified according to the instrumentalities that are em- 
ployed to establish the condition of control in the following 
manner : 

I. By contracts whereby control over the property other than 

the instrumentalities of organization is secured, namely, by 
leaseholds giving the controlling organization 

2. The right to all property except the instrumentalities 
of organization 

2. The right to all such property except money and choses 
in action other than securities and 

3. The right to such portion of the tangible property as 
is capable of being employed to discharge the duties 
and functions of the organization. 

II. By participation through ownership of securities either 

in the form of 

A. Voting control, by virtue of 

1 Interstate Commerce Commission, Special Report No. 1, Wash- 
ington, D. C, 1908, p. 15. 

303 



304 COMBINATION ORGANIZATIONS 

1. The right to exercise the major part of the voting 
power attached to the securities 

2. The right to name the major part of the board of 

directors or managers, whether by virtue of a voting 
trust agreement or otherwise, or 

B. Foreclosure control, by virtue of 

1. The right to foreclose a lien upon all the property of 
the organization 

2. The right to foreclose a lien upon the major part of 
the property. 

III. By agreements creating the right to determine the action of 
the organization in some specified respect or respects. 

Control established by contract is not dependent upon 
any specialized form of organization, but may be instituted 
by any of the forms of ownership that have thus far been 
described, namely, by the personal ownership, the primary 
securities-issuing and the securities-substitution types. 
Because of its versatility it is difficult to assign contract 
control to its proper place- However, since, in practice, 
it is most frequently found to be used in conjunction with 
participation company organizations, it seems to be more 
logical to describe it in connection with that type than 
any other. 

Participation control is by far the most common type to 
be found in this country, where it is used to such an extent, 
through the instrumentality of the holding corporation, that 
control may be said to be the chief use made of that form 
of organization. 

Control by agreement includes several types of arrange- 
ments ranging from informal inter-organization agreements 
to formal agreements creating such forms of organization 
as associations, pools and kartells. These seldom result 
in so complete a control over the organizations affected as 
is possible under the first two classes. 



PRINCIPLES OF CONTROL 305 

Contract Control 

In no other field of enterprise is control through contract 
of leasehold so common as among the American railroads. 
There is scarcely a single great railroad system that has 
not at least in part employed this method of control to 
build up and to consolidate its railway mileage. This 
condition arises from several circumstances. In the first 
place, railways, like all transportation enterprises, are very 
often dependent upon one another for business. A given 
company may operate a section of line connecting two 
other roads while most of its business originates in sections 
of the country that it does not reach. Again, in certain 
sections of the country, especially in the North and the 
South, there are innumerable short lines that serve merely 
as feeders to main line companies. These frequently lack 
complete equipment and are economically dependent upon 
the larger companies in this particular. It is only natural 
under such circumstances that the larger companies, oper- 
ating great systems, should seek to secure this additional 
trackage for their own use without incurring the expense 
of purchasing it or acquiring the companies that own it. 
As a result, they lease such properties on an annual rental 
basis for long periods of time. 

In the second place, a railroad, as are all public utilities, 
is practically a natural monopoly. Two railways can not 
well serve the same territory and return profit on their 
investment. Over long distances, it is true, they compete, 
as in the case of roads running from New York City and 
Philadelphia to Chicago, and from Chicago to the Puget 
Sound. But between these terminal points there is very 
little competition. As a result of this characteristic, the 
urge is extremely strong to acquire the use and control of 
roads already built rather than to build new ones. Here 
the leasehold offers the simplest solution. 



306 COMBINATION ORGANIZATIONS 

The most prominent example of leasehold control in this 
country is to be found in the Southern Pacific railway 
system. In 1894, the Southern Pacific Company secured 
from the Central Pacific Railroad Company, through a 
90 year lease, control over all of the properties, including 
2,289 miles of line of the latter company. It pays for 
this right a fixed rental of $10,000 per year and out of 
the net profit, after operating expenses, maintenance and 
interest charges have been paid, 6 per cent on the capital 
stock to the lessor company. If earnings exceed that 
amount the surplus is divided equally between the two 
companies. In 1914, the arrangement was attacked by the 
Department of Justice as contravening the provisions of 
the Sherman Anti-Trust Act, but the decision of the court 
upheld the agreement as lawful. 

As illustrative of the continued existence of the legal 
entity of the lessor organization under such agreements, 
it is well to point out that the Central Pacific Railroad 
Company was reorganized without disturbing the control 
over its properties by the Southern Pacific Company. In 
1899, the original lessor company was dissolved and the 
title to its properties was acquired by the Central Pacific 
Railway, organized in that year in the state of Utah. 

Most of the railway companies operating in the North- 
eastern part of the country have leased the lines of many 
smaller companies. The Delaware, Lackawanna and 
Western Railroad Company in this way controls some 14 
companies with a total mileage of 702.6 miles. The larger 
units among these companies are the New York, Lacka- 
wanna & Western Railway, 214.4 miles, the Morris and 
Essex Railroad, 119 miles, the Utica, Chenango and Sus- 
quehanna Valley Railroad, 97 miles, and the Syracuse, 
Binghamptom and New York Railroad with 81 miles of 
line. 

There are also instances where the leased lines comprise 



PRINCIPLES OF CONTROL 307 

practically the entire plant and equipment of the leasing 
company. This is the case with the Cincinnati, New 
Orleans & Texas Pacific Railway Company, organized in 
Ohio in 1881 for the purpose of taking over and operating 
the properties of the Cincinnati and Southern Railway 
This railway was constructed by the city of Cincinnati, 
which leased it to the former company for a period of 25 
years in 1881. In 1902, the lease was renewed for a period 
of 60 years from the date of expiration of the original lease. 
The city derives an income of somewhat over $1,100,000 
annually as rental for this railway. 

Among industrials lease control is found to be as 
infrequent as it is frequent among railroads. Where it is 
employed by them it is usually for a short period of time 
with an option to buy the property when the lease expires. 
In 1919, the General Motors Corporation controlled the 
entire plant and equipment of the T. W- Warner Company 
under a three years' lease with option to buy. But such 
examples are relatively few and ordinarily involve property 
that has comparatively small value. Industrial under- 
takings, unlike railways, seldom enjoy a natural monopoly, 
and even their legal monopolies secured through patents 
and trade marks are respectively too short-lived and too 
delicate to be risked by giving the control over them to 
others. 

By and large, it may therefore be said that leasehold 
control is essentially confined to industries in which the 
factor of natural monopoly is large. These would include, 
railways, public utilities, dockage, wharf and terminal 
facilities, and mines. 

Participation Control 

The control arrangements effected through participa- 
tion are all based upon rights that vest by virtue of the 
ownership of securities. Consequently, this method of 



308 COMBINATION ORGANIZATIONS 

control may be brought into use only through such organ- 
izations as possess the power to own and dispose of the 
securities of other organizations. But, since it is necessary 
to provide some means by which the claim on income and 
assets acquired by the participant may finally be vested 
in natural persons, the process ordinarily involves the sub- 
stitution of the securities of the participant control organ- 
ization for those that it has acquired. There are but two 
types of participation organizations that have been exten- 
sively^ used for this purpose. These are the trust and the 
holding corporation. The joint stock company is rarely 
employed. 

Instruments of Participation Control. — Control exer- 
cised through the voting power attached to stocks is by far 
more common than any other method. The percentage of 
stock that it is necessary to own need not always be a ma- 
jority, because by securing a sufficient number of proxies 
it is a simple matter to secure the votes without owning the 
stock. Thus, it was possible for the New York Central 
and Hudson River Railroad Company and the Pennsyl- 
vania Company, in 1906, to control the Reading Company 
through subsidiaries, although together they owned but 43.4 
per cent of the total outstanding stock of the Reading 
Company. 

However, through a proper classification of stocks it may 
be so arranged that but a small ownership interest is neces- 
sary to control a very large and ramified organization. 
This method may properly be called pyramided control. 
For example, the Rock Island Company was so organized 
that the holders of but $25,000,000 of its preferred stock 
could control the entire Rock Island System with its 
15,000 miles of railway and its $1,500,000,000 capitali- 
zation.^ This was possible because the preferred stock was 
given the right to elect the majority of the board of di- 
rectors. 

2 See chart, p. 314. 



PRINCIPLES OF CONTROL 309 

Provision is also frequently made whereby the holder 
of a mortgage bond issue shall have the right to ap- 
point a managing director for the debtor company. Thus, 
the West India Sugar Finance Corporation, organized in 
Connecticut in 1913 to finance sugar corporations in the 
West Indies by advances secured by mortgages, usually 
provides in its indentures for control, or at least represen- 
tation upon the board of directors, of the company whose 
creditor securities it assumes. A similar provision was 
made when the old United States Shipbuilding Company 
was organized in 1902. This company's capitalization 
consisted of $25,000,000, common and $20,000,000 preferred 
stock, and $10,000,000 collateral trust bonds plus $14,- 
500,000 first mortgage bonds. The company gave $20,- 
000,000 of common stock and the $10,000,000 collateral 
trust bonds to acquire the Bethlehem Steel Company. To 
give control to the former Bethlehem owners, it was pro- 
vided that these bonds should have the same voting power 
as $10,000,000 stock. 

The voting trust has also been employed to concentrate 
control through participation. In 1906, the Interborough- 
Metropolitan Company was organized to consolidate the 
traction systems of New York City. It acquired practi- 
cally all of the outstanding stock of the Metropolitan 
Traction Company through the New York Railways Com- 
pany, the Metropolitan Securities Company and the Inter- 
borough Rapid Transit Company. For several years fol- 
lowing its formation the company was controlled by a 
voting trust consisting of A. Belmont, W. Oakman, Thos. 
Ryan, C. Vanderbilt and P. Widener who owned 
$93,200,000 of common stock, leaving $45,700,000 of pre- 
ferred stock and $67,800,000 of bonds outstanding in other 
hands. 

Foreclosure control is not uncommon, for it is customary 
to provide in the mortgage indenture that, in case of failure 



310 COMBINATION ORGANIZATIONS 

of the company to pay the interest on bonds when due, 
the bondholders shall have the right to take over the con- 
trol and operation of the corporation for a limited period 
of time, usually for a period of six months. Control of 
this kind, however, is merely temporary. Thus, the 
Southern Railway Company, in 1906, controlled the Macon 
and Birmingham Railway Company through default of 
the latter in the matter of interest on bonds secured by its 
property and held by the Southern Railway Company. 

A similar right is sometimes given to preferred and de- 
benture stock, examples of which are given in Part VI of 
the text. An exceptional use of this type of securities has 
been made in the organization of the General Motors Cor- 
poration. This corporation had outstanding on January 1, 
1920, the following stocks: 

19,518,895 shares non-par value common 
$16,183,400 6% cumulative preferred 
$16,489,500 6% cumulative debenture stock 
$22,390,000 7% cumulative debenture stock 

If the dividend is regularly paid on the preferred and 
debenture stock, the common stockholders retain control; 
but if it is lapsed on any of the other classes for more than 
six months, the holders of that class take over the control. 
The corporation itself is reported to be controlled by E. I. 
du Pont de Nemours and Company through its subsidiary, 
the Du Pont American Industries Company, largely through 
common stock holdings. Thus, a lapsing of the dividend 
on any other class of stock would shift the control of the 
General Motors Company from the du Pont Company. 

Modes of Participation Control. — Inter-organization 
control through participation may be either sole or joint, 
namely, by a single organization or by several; and direct 
or indirect, that is, without the use of an intermediary or 
with one. There are, then, four modes of control: (1) sole 



PRINCIPLES OF CONTROL 311 

direct, (2) sole indirect, (3) joint direct, (4) joint in- 
direct. The terms " joint " control and " indirect " control 
require some further explanation; the others are self- 
explanatory. 

Joint Control. Where joint control exists, it is fre- 
quently difficult to determine whether participation in the 
controlled organization is solely for investment or primarily 
for control. Thus, the Lehigh and Hudson River Railroad 
Company, with an outstanding capital stock of $1,340,000, 
in 1906, reported its stock to be held by the Lehigh Coal 
and Navigation Company, the Central Railroad Company 
of New Jersey, the Delaware, Lackawanna & Western Rail- 
road Company, the Erie Railroad Company and the Penn- 
sylvania Railroad Company. But of the six companies, 
only the Erie conceded the relationship to be that of joint 
control, the others claiming that it was of the nature of an 
investment.^ Similar joint control by numerous railroads 
is to be found in most union station and terminal railway 
projects. 

The fact that minority holdings are often in a position 
to control results in some peculiarly complex situations in 
cases of joint control. In 1906, the Des Moines Union Rail- 
way Company is reported to have been jointly controlled 
by the Chicago, Milwaukee & St. Paul Railway Company, 
the Wabash Railroad Company and F. M. Hubbell, Son & 
Company,^ in spite of the fact that the latter company 
owned five eighths of its stock. The St. Paul owned only 
two eighths and the Wabash one eighth. Under the char- 
ter of the Des Moines Company it required at least seven 
eighths of the outstanding stock to elect a director, to 
amend the charter, or to increase the capitalization. 
Hence, the smallest stockholder was as much in control as 
the other two combined. 

2 Interstate Commerce Commission, Special Report No. 1, Wash- 
ington, 1908. 
* Ibid. 



312 COMBINATION ORGANIZATIONS 

Indirect Control. This method of control results in ex- 
treme complexity of inter-relation between ownership or- 
ganizations. It may be instituted: (1) Through one or 
more intermediary holding companies; (2) through a 
trustee or an individual or individuals in a fiduciary ca- 
pacity with respect to the controlling company; (3) 
through a so-called " family interest " heavily interested 
in the companies concerned; and (4) through fictitious or 
non-existing persons. 

(1) Control through intermediary companies. Where 
an intermediary company is employed to effect control, 
such a company must have the power to hold the securities 
of other companies. This is the means used by E. I. du 
Pont de Nemours & Company in its control over the Gen- 
eral Motors Corporation, itself a holding company control- 
ling some 55 companies and holding an important interest 
in 18 others. In 1917, the du Pont concern acquired 27 
per cent of the stock of the General Motors and the Chev- 
rolet Motor Company. The latter was subsequently ac- 
quired by the General Motors. In 1918, the Du Pont 
Company caused the Du Pont American Industries Com- 
pany to be formed and transferred to this subsidiary its 
holdings in the General Motors. In 1920, the Du Pont 
American Industries Company acquired by purchase from 
the Durant interests what was reported to be a majority of 
the outstanding common stock of the General Motors, 
thereby giving control over the whole organization to E. I. 
du Pont de Nemours & Company. 

The United States Steel Corporation also is built up after 
this same manner. Through its 11 great intermediary 
holding companies, this corporation controls, chiefly 
through ownership of all outstanding stock, nearly 150 
other companies. The five great packers have made ex- 
tensive use of this principle in acquiring control over some 
669 concerns. 



PRINCIPLES OF CONTROL 313 

By successively placing one intermediary holding com- 
pany in control of another, it is possible to build up the 
famous pyramided, or progressive, control that was so 
successfully used by a small group of financiers in the 
Rock Island Railroad System and in the Atlantic Coast 
Line, shown in the accompanying chart outlining the inter- 
corporate control as it was in 1906. The Rock Island 
Company at that time had outstanding $49,956,880 in pre- 
ferred stock, which had the right to name the majority of 
the board of directors. Control of the system therefore 
lay in the hands of those who owned a majority of this class 
of stock. In the Atlantic Coast Line Company, an owner- 
ship of slightly more than $5,000,000 of the stock of that 
company controlled solely and jointly through ownership 
and lease a railway system over 11,000 miles in extent, 
with a total capitalization of over $725,000,000. (See 
page 314). 

(2) Control through trustees or fiduciaries. Where a 
holding company owns the controlling securities of another, 
it may turn these securities over to trustees as a trust es- 
tate, with itself as beneficiary. If the trust agreement is 
properly drawn up, the holding company may then control 
the other by naming trustees who carry out its will. This 
practice was found by the Interstate Commerce Commis- 
sion ^ to have been used in a number of instances by rail- 
road companies. It serves to cover up the true relation 
of control. More recently the Federal Trade Commission 
has uncovered numerous instances where one or more of the 
five great packing companies have used trusted individuals 
to hold controlling interests in other companies for them 
in a fiduciary capacity.^ Such individuals are called 
" dummy stockholders." The report of the Commission 
says, " Every one of the five big packing companies prac- 

5 Ibid p. 19. 

6 Report on the Meat-Packing Industry, Part I, pp. 264, et. seq. 



314 



COMBINATION- ORGANIZATIONS 



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PRINCIPLES OF CONTROL 315 

tices it to a greater or less extent. Even those whose State 
of incorporation permits direct holdings have subsidiary 
companies whose stock is held in the name of a trusted 
employee or attorney, or other party for the benefit of the 
primary company. 

" Similarly stock investments by the individual members 
of the packer families or by the family estates are fre- 
quently held by dummies. 

" The common practice in the case of dimimy holdings 
is to record on the subsidiary or affiliated company's stock 
books the name of the dummy as a stockholder of record 
and to direct him to assign the stock in blank to the parent 
company or other person designated by the parent com- 
pany, or to the members of the family v/ho are the true 
owners. The stockholder of record, therefore, is the 
idummy, either a clerk or a confidential man of the real 
owners who directs the voting of the stock and receives all 
dividends." 

In this way, Swift & Company and Armour & Company 
were reported to hold 50.3 per cent of the stock of the 
Record Stockman Publishing Company of Denver; the 
former through one H. A. Chetham, and the latter through 
one Guy S- Bailey, whose names appeared as stockholders 
of record. It was in this way, also, that the Morris in- 
terests concealed their control over the Kansas City Stock 
Yards Company. The bulk of the stock of the latter com- 
pany was recorded as being owned by E. V. R. Thayer and 
Roy A, Hitchings, but was assigned by them in blank and 
turned over to the Estate of Edward Morris. 

(3) Control through family interest and individual 
holdings. While this method of control does not involve 
participation by one company in another, it nevertheless 
is of sufficient importance to demand a word of explanation. 
Family interests are sometimes turned into trust estates 
by testament, as in the case of the estate of Jay Gould and 



316 COMBINATION ORGANIZATIONS 

of Edward Morris. These estates, for all practical pur- 
poses, perform the same function as a holding company, 
in so far as control over other companies whose securities 
they hold is concerned. While they do not provide a 
direct line of control descending from a control company 
through the estate to the company that the latter controls, 
they still create a community of interest resulting in such 
close cooperation that it frequently partakes of the nature 
of control. 

Thus, the International and Great Northern Railroad 
Company has commonly been considered to be part of the 
Missouri Pacific System. The only binding link between 
it and the Missouri Pacific Railway Company was through 
the estate of Jay Gould. This estate, in 1906, was reported 
to own $20,215,000 out of $77,407,860 of the outstanding 
stock of the Missouri Pacific and practically all of the out- 
standing stock of the International and Great Northern. 

Family control, according to the Federal Trade Com- 
mission's Report on the Meat-Packing Industry, is very 
common with Swift & Company, Morris & Company and 
Armour & Company. The controlling interest in these 
three companies is very closely held, respectively, by the 
Swift, Morris and Armour families. Through family in- 
terests these packers are listed as controlling nearly 50 
companies, some of which are more or less unrelated to the 
packing business. Armour & Company controls the 
Armour Grain Company through a family interest of 87 
per cent of that company's $1,000,000 voting stock. And 
the Armour Grain Company in turn controls through stock 
ownership 5 other companies. 

(4) Control through fictitious persons. In instances 
where the relation of control is sought to be concealed, 
fictitious, or non-existing persons, have sometimes been 
recorded on the stock books of the controlled company as 
the stockholders of record. Thus, the Federal Trade Com- 



PRINCIPLES OF CONTROL 317 

mission reports that the Chicago Bearing Metal Company 
which manufactures certain supplies for railroad use is 
controlled by the Swifts and affiliated interests. Among 
the stockholders of record were L. V. Robinson and H. B. 
Natches, care of C. F. Stephenson, of Swift & Company 
and L. R. Poor, address, Union Stock Yards, Chicago. 
Replies to questionnaires sent out by the Commission to 
these names were made by C. F. Stephenson, an employee 
of Edward F. Swift, who in each case attached a memoran- 
dum that there were no such persons, and stated that " Mr. 
Edward F. Swift is now and at all times has been the owner 
of this stock." ^ 

It is now clear that there may appear in a single control 
organization a great variety of ways in which control may 
be established. The four modes of control with their sev- 
eral variations may of course be multiplied by the several 
distinct instrumentalities employed to institute the control. 
The closer the control organization comes to a direct 
violation of federal and state laws against monopoly and 
restraint of trade, the greater will be the care exercised 
to conceal the true condition of control. 

It remains but to describe a few representative types of 
control companies, in order to show the great flexibility 
of this form of participation organization. 
7 Ibid, p. 269. 



CHAPTER XVII 

CONTROL COMPANIES 

A. Trusts as Control Companies 

Prior to the year 1888, when the state of New Jersey 
first adopted a general law giving to its corporations the 
power to hold the securities of other corporations, control 
through participation could be brought about only through 
the joint stock company and the trust form of organiza- 
tion. The holding, or combination trust, was the favorite 
form employed and proved itself admirably adapted to 
this work. Under it the parties to the Standard Oil Trust 
Agreement, of 1882, brought together under a single unified 
control the varied interests of individual proprietorships, 
partnerships, joint stock companies and corporations. 
Nowhere in the organization was the holding corporation 
used. 

This famous trust was, however, merely a reorganization 
of an earlier one created by the members of the Standard 
Oil Group, in 1879. The conception of the idea of using 
the trust form for control and combination purposes has 
quite generally been attributed to S. C. T. Dodd, the 
attorney for the Standard Oil Company of Ohio. 

Between the years 1880 and 1890 a number of large 
trusts were formed, most of them patterned after the 
Standard Oil Trust. In 1884, the American Cotton Oil 
Trust, embracing some eighty-five concerns doing business 
throughout the South was formed in the state of Arkansas. 
In 1887, the Distillers' and Cattle Feeders' Trust, the 
National Lead Trust and the Sugar Refineries Company 
were formed. These were popularly known as the 
" Whiskey," " Lead " and " Sugar " Trusts. 

318 



CONTROL COMPANIES 



319 



The legal principles governing trusteeship have already 
been explained. These apply with equal force to a simple 
as well as to a complex trust. However, since the trusts 
here under consideration involve participation in other 
organizations that retain their distinct entity, a few words 
of explanation concerning them will not be amiss. 

The Standard Oil Trust of 1882/ — This trust because 
of the complexity of its organization brings out more 
clearly than any of the others the nature of the organiza- 
tion and the transactions involved in constituting it. The 
accompanying chart is a diagrammatic sketch of this trust. 



DIAGRAM ILLUSTRATING THE TRANSACTIONS INVOLVED 
IN rORIiING THE STANDARD OIL TRUST OF 1882 



-^i^^Ziii^^^-^^^f^ 



BOARD OF 
-H TRUSTEES 




STANOAf?P 
0/L TfiUSr 



5 



The heai/y margins ''ncf/cafe fhe un/f3 ffjat remain af^er formation oft/^e Iru^t one/ 

i-he c/ofted /ines /eadingto fiJem ^hou/ coatro/ Aj/ -i-fie Board of Trustees. 
The assets, etc. of indii/icfua/s, partners and Group T corporations and associations 
ha ue been transferred to tt^e 6fanc/ard O// ffomfianles and the units dissoiued. 
The figures indicate fhe order uf frans9Ctior7s -6<?^/>7//7^ u/i^h form^lon of ^d. O// Cos. 

AH.STOCtfO£:ff. 

1 A copy of this trust agreement will be found in Part VI of the 
text, pp. 560-571. 



320 COMBINATION ORGANIZATIONS 

The parties to the agreement, who were the settlors of the 
properties upon the board of trustees, were divided into 
three classes, namely: (1) All stockholders and members of 
14 named corporations and limited partnerships; (2) some 
46 named individuals; and (3) a portion of the stockholders 
and members of 27 named corporations and limited part- 
nerships.2 It was then further provided that a Standard 
Oil Company should be formed in each of the four states 
of Ohio, New York, New Jersey and Pennsylvania; but 
the Ohio company already existed. The settlors of Classes 
1 and 2 were thereupon to convey all of the property, real 
and personal, assets, and business mentioned and embraced 
in certain schedules to the Standard Oil Companies in ex- 
change for the stocks of these companies whose par value 
equaled a fair valuation of the properties. The former 
stockholders, partners and individuals thus became stock- 
holders of the Standard Oil Companies. They were then 
to turn this stock over to the board of trustees and receive 
in return Standard Oil Trust Certificates of equal value. 

These transactions necessitated the dissolution of some 
of the original organizations. This was easily accomplished 
in the case of settlors of classes 1 and 2. However, with 
class 3, where the signers of the agreement comprised but 
part of the stockholders and partners, the entity of the 
organizations, had to be preserved. Hence, it was provided 
that the stockholders and partners of this class should 
deposit their securities directly with the trustees. But 
this arrangement was changed by a supplementary agree- 
ment entered into a few days later by virtue of which the 
trustees were given authority to decide which companies 
should be dissolved and their assets absorbed by the 
Standard Oil Companies and which should remain under 
the direct 'control of the trustees. This latter classification 

2 The organizations called limited partnerships were largely 
special joint stock companies. 



CONTROL COMPANIES 321 

has been employed in the diagram where Group I corpora- 
tions and associations represent those that were dissolved 
and Group II those taken over directly. 

After all transactions had been completed there re- 
mained under control of the board of trustees the four 
Standard Oil Companies, Group II Corporations and 
Group II Associations, all other organizations having been 
dissolved. 

The Whiskey Trust. — In the Distillers' and Cattle 
Feeders' Trust the procedure was somewhat different. 
Among the settlors were corporations and ordinary partner- 
ships. In order to simplify the control it was provided that 
" the parties hereto who are not corporations shall become 
such before this deed takes effect." It is also provided 
that '^ the several corporations, parties to this agreement, 
shall maintain their separate organization, and each shall 
carry On and conduct its own business. . . . The capital 
stock of each corporation shall be transferred to the board 
(of trustees) and in lieu of the same, certificates not ex- 
ceeding fifty millions of dollars, divided into five hundred 
thousand shares, each of one hundred dollars, shall be 
issued by the board and distributed as hereinafter 
provided." 

Legal Status. — The further spread of this form of trust 
organization was checked through action taken by several 
of the states and the United States. It was at first attacked 
as an agreement illegal under the common law; the gen- 
eral contention being, that corporations committed an act 
ultra vires by giving the power of management and control 
over to a board of trustees. In 1887, the state of Louisiana 
attacked the American Cotton Oil Trust on this point. 
Shortly thereafter the state of New York brought suit 
against the North River Sugar Refining Company to force 
it out of the Sugar Trust, and in 1890, the state of Ohio 
began an action against the Standard Oil Company of 



322 COMBINATION ORGANIZATIONS 

Ohio that finally resulted in the dissolution of the Standard 
Oil Trust. 

In the Ohio case the court held,^ that, while the corpora- 
tion is a separate entity from its stockholders, this fiction 
will be upheld only so long as a proper, harmless use is 
made of it; but that in the case of the Standard Oil Com- 
pany, the act of the stockholders in giving the control over 
the corporation to the board of trustees constituted an 
act of the corporation and hence was null and void because 
such an act was beyond the power of the corporation. In 
the second place, it held that " its object was to establish a 
virtual monopoly of the business of producing petroleum, 
and of manufacturing, refining and dealing in it and all its 
products, throughout the entire country, and by which it 
might not merely control the production, but the price at 
its pleasure. All such associations are contrary to the 
policy of our states and void." 

The second phase of the attack against trust organiza- 
tions with monopolistic qualities took the form of specific 
legislation against trusts, pools, agreements and conspira- 
cies in restraint of trade. Kansas passed such an act in 
1889. The famous Sherman Anti-Trust Act was enacted 
by Congress in 1890. About the same time, Kentucky, 
Michigan, North Carolina and other states adopted similar 
legislation. By 1894, some twenty states had such laws. 

Present Day Holding Trusts. — Today the combination 
or control trust is to be found in but a few states, notably 
in Massachusetts. The component elements of these trusts 
ordinarily are not corporations but usually joint stock 
companies or voluntary associations. They are to be 
found chiefly among the public utilities enterprises. The 
Central Massachusetts Light & Power Company, a trust 
formed in 1912, owns the entire capital stock of the Black- 
stone Electric Light Company, the Central Massachusetts 

3 49 Ohio St. 137: 30 N. E. 279. 



CONTROL COMPANIES 323 

Electric Company, the Union Light and Power Company 
and the Ware Electric Company. It serves 23 Massa- 
chusetts towns. The Central Massachusetts Power Com- 
pany, 1912, and the Conamonwealth Gas and Electric 
Companies are similar trusts. The Massachusetts Light- 
ing Companies, also a trust, controls through ownership 
of securities some eighteen gas and electric lighting com- 
panies organized as voluntary associations and two cor- 
porations. 

B. Holding Corporations as Control 
Companies 

The court decisions and the legislative acts making the 
trust an illegal type of control organization where corpora- 
tions either directly or through their stockholders became 
parties to it, came at the time when it was possible — at 
least under the laws of New Jersey — to employ the hold- 
ing corporation for the same purpose. However, its gen- 
eral use did not set in at once, but dates from about 1897, 
namely, with the beginning of the period of industrial 
activity following the depression which began with the 
panic of 1893. Since that time, the holding corporation 
as a control organization has become a firmly established 
institution ; and it is today the form of ownership organiza- 
tion under which the great business establishments of the 
country are conducted. It is now quite common in such 
fields of business enterprise as the construction and opera- 
tion of railways, street and interurban railways, gas and 
electric plants, most branches of manufacture with but 
few exceptions, in the petroleum industry, in mining, mill- 
ing and smelting, meat packing, telephone and telegraph 
services, ocean transportation and in trade and commerce. 
Indeed, it may well be called the highest type of ownership 
organization that has yet been developed for use under a 
system of private enterprise. 



324 COMBINATION ORGANIZATIONS 

The holding corporation is exceptionally well adapted 
for the institution of control over other corporations with 
the greatest facility. It lends itself readily to the applica- 
tion of the several instrumentalities of control that have 
been enumerated and permits of the use of the many differ- 
ent modes of control that have been described. Conse- 
quently, a large holding corporation need not confine itself 
to a single instrumentality or mode of control, but may em- 
ploy a number of them in binding together the several com- 
ponent units of its organization. As a result of this 
diversification, some of our larger business organizations 
present a complexity and ramification that it is difficult 
to grasp. 

In the accompanying chart is shown a hypothetical 
control organization built up through the use of the holding 
corporation and several instrumentalities and modes of 
control. It illustrates merely some of the possibilities 
that present themselves, and is not intended to depict any 
actual corporation. However, it is not overdrawn, since 
most of the methods of control there employed may be 
found in the Federal Trade Commission's Report on the 
Meat Packing Industry, published in 1919, and likewise 
in the special report on Intercorporate Relations Among the 
American Railway Companies issued by the Interstate 
Commerce Commission in 1908. 

In order to present clearly the effect of such control 
organizations upon the issuance, substitution and distribu- 
tion of securities, the following statement of the assets 
and liabilities of the twelve hypothetical corporations 
shown in the chart has been prepared. 



CONTROL COMPANIES 



325 




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326 



COMBINATION ORGANIZATIONS 



Summarized Statement of Assets and Liabilities of 
Companies shown in the Chart 







Liabilities 




Company 


Assets 






Amount 


By whom 
held 


A 


$2,050,000 B Stock 
3,000,000 C Stock 
3,000,000 D Stock 
3,000,000 J Bonds 
1,000,000 K Bonds 


$3,000,000 Stock 
6,050,000 Stock 
3,000,000 Bonds 


John Smith 

Pubhc 

Pubhc 


B 


1,500,000 E Stock 
550,000 G Stock 


2,050,000 Stock 


Company A 


C 


1,500,000 E Stock 
2,500,000 Plant 


3,000,000 Stock 
1,000,000 Bonds 


Company A 
Public 


D 


3,000,000 Plant 


3,000,000 Stock 


Company A 


E 


3,000,000 Plant 

Lease of $2,000,000 E Plant 


1,500,000 Stock 
1,500,000 Stock 


Company C 
Company B 


F 


2,000,000 Plant 

(Leased to E) 


2,000,000 Stock 


Public 


G 


2,000,000 H Common Stock 
1,050,000 Investments in 
outside concerns 


550,000 Pfd. Stock 

500,000 Pfd. Stock 

2,000,000 Com. Stock 


Company B 
Pubhc 
Public • 


H 


3,000,000 I Stock 
2,000,000 Plant 


3,000,000 Pfd. Non-Vot. 
2,000,000 Com. Stock 


Pubhc 
Company B 


I 


5,000,000 Plant 


3,000,000 Stock 
2,000,000 Stock 


Company H 
Public 


J 


8,000,000 Plant, etc. 


5,000,000 Stock 
3,000,000 Bonds 


Public 
Company A 


K 


3,000,000 Plant 


2,000,000 Stock 
1,000,000 Bonds 


Public 
Company A 


L 


1,000,000 Plant 


600,000 Stock 
400,000 Stock 


John Smith 
Public 



The value of the capital underlying the securities of this 
hypothetical control organization is $30,550,000. Upon 
this real basic capital as supporting value a grand total of 
$51,150,000 in securities consisting of $43,150,000 of stocks 
and $8,000,000 of bonds has been issued. Of the stocks 
the public holds $22,950,000 and of the rest, $16,600,000 
is held by the various companies and $3,600,000 by John 
Smith, while the bonds are equally distributed between 
the companies and the public. In all, then, the companies 



CONTROL COMPANIES 327 

hold $20,600,000 of the securities, the public $26,950,000 
and John Smith $3,600,000. The amount held by the com- 
panies represents the extent to which substitution of securi- 
ties has been employed in effecting this centralized control. 
It should be noted, however, that the control of the whole 
organization rests in the hands of John Smith together 
with such other persons as own a little more than $1,050,000 
of Company A stock ; and if John Smith secures the proxies 
of the holders of these shares, he is in a position to exercise 
control. The same result could be more permanently ob- 
tained if John Smith and the others created a voting trust 
of their majority holdings of Company A stock. 

It is, therefore, apparent that control over the entire 
basic capital of $30,550,000, for all practical purposes, is 
in the hands of John Smith, although he has invested but 
$3,600,000 in the stocks of two of the companies, namely, 
Company A and Company L. This sum represents but 
one fourteenth of the total amount of securities issued 
and but little more than one eighth of the total basic 
capital. Thus, through the medium of substitution of 
securities and the use of the control company may the 
public be used to furnish industrial capital while those who 
promote the enterprise can, with but a relatively small 
investment, control a great industry. 

The Control Corporation Among the American Rail- 
roads. — Practically each one of our great railway systems 
has at its head a control corporation. The New York 
Central Railroad Company holds that position in the 
Vanderbilt System, the Pennsylvania Company in the 
Pennsylvania System, the Union Pacific Railroad Com- 
pany in the old Harriman System, the Southern Railway 
in the Morgan group and so on. 

A few examples will suffice to show the use made of the 
holding corporation and the nature of the control by means 
of which these systems are held together. For this purpose 



328 COMBINATION ORGANIZATIONS 

the organization of the Harriman System and of the 
Queen & Crescent Route will be briefly described. 

The Harriman System was built up primarily by utiliz- 
ing the Oregon Short Line Railroad Company, a subsidiary 
of the Union Pacific Railroad Company, to acquire stock 
control over the Southern Pacific Company, thus binding 
together the great Union Pacific and Southern Pacific 
railway systems. Somewhat later, through the Railroad 
Securities Company, also a subsidiary of the Union Pacific 
Railroad Company, the Illinois Central Railroad Company 
was added to the group. 

In 1901, the Harriman interests made their famous 
" raid " on the stock of the Northern Pacific Railway 
Company which resulted in a struggle with the J. J. Hill 
and J. P. Morgan interests that was finally brought to an 
end by the formation of the Northern Securities Company 
and its subsequent dissolution by order of the United States 
Supreme Court. The events leading up to the formation 
of the latter company illustrate clearly how competition 
tends to bring such combinations into being. 

In 1901, the Northern Pacific Railway Company and 
the Great Northern Railway Company began to buy con- 
trol over the Chicago, Burlington and Quincy Railroad 
Company. They purchased the stock of this company 
by exchanging 20-year 4 per cent bonds to the value of 
$200 for each $100 share of stock. Within a short time 
they had acquired 98 per cent or $108,000,000 of the out- 
standing stock for which they paid $216,000,000. The 
Burlington road, however, was one of the chief feeders of 
the Union Pacific for its west bound traffic, and Harriman, 
fearing that this traffic would be diverted to the northern 
roads, proposed to the Hill-Morgan interests that he be 
permitted to secure a substantial interest in the Burlington. 
This proposal was rejected. He then turned his attention 
to securing control over the Northern Pacific Railway 



CONTROL COMPANIES 329 

Company which at that time held 49 per cent of the Bur- 
lington stock. Through the Oregon Short Line Railroad 
Company he soon succeeded in acquiring $37,000,000 of 
the common stock and $41,000,000 of the preferred stock 
of the Northern Pacific. This company had outstanding, 
at that time, some $75,000,000 preferred and $80,000,000 
common, all of which was voting stock- Hill and Morgan 
became apprehensive of the large purchases of Northern 
Pacific stock and bought up the majority of the common 
stock. Although Harriman owned over 51 per cent of the 
total voting stock, he failed in his attempt to secure control 
of the road because its charter provided that the board of 
directors might redeem and retire the pfreferred class. 
This the opposing group now decided to do. But Harriman 
had won a point and it was agreed upon to organize the 
Northern Securities Company to consolidate all interests. 
This company was thereupon organized on November 13, 
1901, with an authorized capital stock of $400,000,000, all 
of one class.* This stock was now exchanged for the stocks 
of the Northern Pacific at the rate of $115 of Securities 
stock for each $100 share of the Northern Pacific, and $180 
in the former for each $100 share of the Great Northern. 
Harriman received over $82,000,000 of the new company's 
stock for his holdings. In all, the Northern Securities 
Company thus acquired 96 per cent of the outstanding 
stock of the Northern Pacific and 76 per cent of that of the 
Great Northern. 

The Northern Securities Company was at once attacked 
by the state of Minnesota and by the United States Gov- 
ernment as a combination in restraint of trade because it 
consolidated competing lines. ^ In 1904, the case came 

* A reprint of the charter of this company is given in Part VI. 
It is interesting because of its description of the purpose of the 
company. 

5 United States v. Northern Securities Co., 120 Fed., 721; Minne- 
sota V. Northern Securities Co., 123 Fed., 692. 



330 COMBINATION ORGANIZATIONS 

before the United States Supreme Court which affirmed the 
decision of the lower court. This judgment was that the 
Northern Securities Company was an illegal combination 
in restraint of trade, and enjoined it from voting the stock 
of the two railroad companies that was in its possession, 
and the two companies from paying any dividends on their 
stock to the Securities Company.^ As a result of this 
decision the stockholders decided to dissolve the company 
and to distribute the stock that it held to its stockholders 
on a pro rata basis. The Harriman interests objected to 
this and brought suit to recover the Northern Pacific shares 
which they had sold to the Securities Company, but the 
Supreme Court sustained the pro rata plan of distribution, 
which was thereupon carried out."^ 

In 1912, the Union Pacific-Southern Pacific System was 
constituted essentially as shown in the chart in so far as 
railroad properties are concerned. It is to be noted that 
the Union Pacific Railroad Company is not only an operat- 
ing but also a holding company. It not only owned and 
operated nearly 3,000 miles of railways, but it also con- 
trolled through stock ownership the Oregon Short Line 
Railroad Company and the fourteen small companies 
shown on the left, and in addition it controlled the Illinois 
Central Railroad Company and held a 27 per cent interest 
in the Chicago and Alton Railroad Company. Its direct 
holdings, however, are few and for the most part the system 
is held together by the Oregon Short Line Railroad Com- 
pany. This company, with a capitalization of $100,000,000 
in stock and $135,000,000 in bonds, besides owning and 
operating over 1,000 miles of railways, held $126,000,000 
of the stock of the Southern Pacific Company, $50,000,000 
of the stock of the Oregon-AVashington Railroad & Navi- 
gation Company, $12,500,000 of the stock of the San Pedro, 

6 Northern Securities Co. v. United States, '93 U. S. 197. 
■^ Harriman v. Northern Securities Co., 197 U. S. 244. 



CONTROL COMPANIES 



331 



Los Angeles & Salt Lake Railroad Company and a con- 
trolling interest in seven smaller companies and had stock 
investments in the New York Central, Sante Fe, Chicago, 

RAILROAD COMPANIES OF THE HARR I MAN SYSTEM IN 1911 



UNION PACIFIC 
RR. CO, 

$316 til Ilt53g9 Mill. 



OregonShort Line 

RR.Co. 
109311. $ IOOnill. K 



"'?,^ 



Columbia Southern Ry.Co. 
I9n $500 Th. 



Grays Harbors Puoet-Sd Ry.Ca 
$10 Th. 



Kansas City Tcrinlnal Co. 
$IOOTK 



Leavenworth* TopeKa Ry.Co. 
$25 Th. 



Ortgon* Wasiiington Ry. Co. 
1 1 Mill. 



St. Joseph & Grand IslandRR. 
CO. $4.1 Mill. 



SanftdraLosAnjeles 
*SaltUkeRR.Co. 
94IM. $g5MiH. 



Ul. 



Cascades 
RR.CO. 

6ri. $300Th. 




I iNVESTtlENTS \ 
!NewYorhCent.$l7.8Mill.! 
-J Santa Fe $I0^ ■■ ' 
jChi.MiLXSt.P $ l.a » I 
!ChL»North»v'n $ 40 " j 
I Northern Pac. $ 2X) " i 
j6_reat North^n_$_ 16 _"_ j 



lore i Ohio , 

R R Co. , I 

$2/1 Hill. 



Oregon Washington 

RRSNavijationCo. 

$50Mill. 



Columbia&Palouse 

RR.CO 
I45M. $50«ill. 



U+ah Ujht & Ry. 

leMin. 



Salmon River 

RR.Co. 
66t1. SIIOTh. 



X_ 



Central Idaho 
RR.Co. 



Mai hour Valley 
Ry. Co. 
$56.4 Th. 



Camos Prairie 
RR.Co. 
$?OTh. 



Pacific Fruit 





Walla Walla % 
OolumbiaR.RR.Ca 
45n. $700m 



Southern Pacific 
RR.Co. of Calif. 
3290 n.$ 160 Mill 



iwejton, Harrisburg 
aS.Antonio Ry.Co. 
I3I0M. $27n(ll. 



El P^so Union Pas- 
senger Depot Co. 
4.SM. $28Th. 



Chicago* Northern 

RR.Co. 
30M. $32 Th. 



tlorjan'sLouiSiana 
i Texas RRaSS.Ca 
3I5M. $I5MIIL 



/ 



Central Pacific Ry. 

Q<i.Ue9sed) 
(447M. $60 Mill. 



Southern Pacific 

RR Co. Arizona 

$20 Mi 1 1. 



Southern Pacific 

RR-Co. N-Mexico. 

17 Mill. 



Houston &Shrfve 
port RR. Co. 
40H. $400Th. 



Oregon* California 

RR.Cft 
664M. $19 Mill. 



Iberia& Vermillion 

RR.C0. 
I5M. $300Th 



South Pacific 
Coast Ry. Ca 
$8M. is Mill. 



Louisiana Western RR.Co 
I96M. £216 Th. 



6ilaValley,Globe»Northern y 
12611. Ry.Co. $2hill. 



_z: 



San Bernadino S 

RedlanclsRR.Ca 
10 M. $200Th. 



SfranciscoTNorth 
em F^ific R>.Ca 
leSM. $6 Mill. 



Calif. Northeast-em Ry. -/ 

40M. Co. $i.5&nui- 



North Shore RR.Co. 
a7M. $6 Mill. 



Maricopai Phoenix RyCo > 
42n. $IMI||. ^ 



Sunset Railroad Co. 
32 M. $S00Th. 



Independences Monmouth i^ 
izn RR,C9. $|Z7Ttl. 



Cananea, taqui R.a PacR R. 
Cg $1.25 Mill 



Houston&Texas 
Central RR. Co. 

695M. JlOMill. 



Fort Worth Union 

Passenger Station 

Co. tlOQTh. 



Car son& Colorado 
Ry.Ca 
$6.36Mill. 



Nevada & California 

RyiCo. 
3ian. $6.837 ffiL 



Texas&N.Orleans 

RR.Co. 
44IM. $6Mill. 



Houston, East 8 
WestTexasRR.Co. 
I9IM. $2 Milt 



SanFraneisoo 
Terminal Ca 

$gMill. 



Milwaukee & St. Paul, Chicago & Northwestern, Northern 
Pacific and Great Northern aggregating $39,200,000. 
Thus, this company, with its $100,000,000 capital stock, 



332 COMBINATION ORGANIZATIONS 

held nearly $250,000,000 in the stocks of other railway 
companies besides its thousand miles of railways. 

The Southern Pacific System also presents a peculiarity 
of organization that deserves a few words of explanation. 
At the time of the construction of the Southern Pacific 
Railway under C. P. Huntington, in the latter half of the 
decade, 1880-1890, it was found advisable to incorporate 
three companies under which to operate the railway mile- 
age constructed in California, New Mexico and Arizona. 
These were the Southern Pacific Railroad Company of 
California, of New Mexico and of Arizona, respectively. 
Then in order to centralize control the Security-Holding 
Company was organized and acquired a majority of the 
stock of these three companies. Later on, the Southern 
Pacific Company, a pure holding corporation, was or- 
ganized to supplant this company. The control of the 
Southern Pacific Company over the Central Pacific Rail- 
road Company is through leasehold on the entire equip- 
ment of the latter. The Southern Pacific Company today 
owns practically the entire outstanding stock of 20 railroad 
companies and leases several others, all of which it oper- 
ates under the name of the Southern Pacific System. In 
addition to this, it owns practically all of the stocks of 
29 other companies, among which are a lumber company, 
several land development and irrigation companies, several 
oil exploration and pipeline companies, several city rail- 
way and power companies, several interurban electric 
companies and a steamship company. It also holds a 
stock interest in 12 other concerns including several water 
and land companies, the Louisiana Sugar Exchange, the 
Beach Hotel Company and the New Orleans Board of 
Trade, Limited. 

In 1912, the Supreme Court of the United States ordered 
the Union Pacific Railroad Company to give up its control 
over the Southern Pacific Company as it held this relation 



. CONTROL COMPANIES 333 

to be in contravention to the Sherman Anti-Trust Act. 
The decree of dissolution ordered the Union Pacific Com- 
pany to divest itself of the ownership of $126,650,000 of 
the Southern Pacific Company's stock and to prevent this 
stock from falling into the hands of the stockholders of 
the Union Pacific. Of this stock $38,292,000 was given 
to the Pennsylvania Company in exchange for $42,647,200 
of the stock of the Baltimore and Ohio Railroad Company, 
consisting of equal amounts of common and preferred 
stock. The other $88,357,600 of Southern Pacific stock 
was turned over to the Central Trust Company of New 
York which issued trust certificates for that amount to 
the Union Pacific Company. It was also ordered that 
these trust certificates should be sold to persons other than 
Union Pacific stockholders by September 2, 1913. These 
transactions were not finally completed until December 31, 
1915, when the Union Pacific directors reported a net profit 
of $16,099,190 from the sale and disposal of the company's 
Southern Pacific holdings. In 1914, all but $3,594,035 
common and $1,805,992 preferred stock of the Baltimore 
and Ohio Railroad Company was distributed as a property 
dividend to the Union Pacific stockholders- In this way 
was the centralized control binding these two great systems 
together broken, and today they operate as competing lines. 
Although most of our larger railway systems have been 
formed by means of the simple control relations that exist 
in the Union Pacific and Southern Pacific Systems, this by 
no means is without exceptions. For example in the Queen 
and Crescent Route this high degree of centralization of 
control is conspicuously absent. That system, as will be 
seen from the accompanying chart illustrating its organi- 
zation as it was in 1905, was held together not through a 
single control corporation, but through the interrelation 
by majority and minority holdings of voting stock by 
three more or less independent, or at least uncontrolled 



334 



COMBINATION ORGANIZATIONS 



companies. The system made liberal use of pure holding 
corporations. Of these the most prominent was the Michi- 
gan Securities Company, a corporation that had but $20,- 
000 of capital stock but that held a controlling interest in 
the Pere Marquette Railroad Company with its $72,500,000 
of voting stock, a 48 per cent interest in the Cincinnati, 
Indianapolis and Western Railway Company with its 
$7,000,000 of voting stock, a large share of the $12,000,000 



INTERCORPORATE RELATIONS OF THE QUEEN AND CRESCENT ROUTE 
ABOUT 1906 




Ooffed/rames indicate pure eon fret Com- 
panies. 
Com/ianies u/itfi heauy framfs eo/nfiriso 

//><? Sueeri t Crescent Poute. 
O/ift^ ^/7e t/oting sA?cfr t. 



Based one o/rart srtd data fi^/n 
Sfiecia/ fieport /Valofthe 
tnterstate Commerce Comnistien 
I90a. 



voting stock of the Cincinnati, Findlay and Fort Wayne 
Railroad Company and in addition a three-eighths interest 
in the Southwestern Construction Company with $2,051,300 
voting stock, and that in turn controlled the Cincinnati, 
New Orleans and Texas Pacific Railway Company. Thus 
this holding company partakes of the character of a pure 
" dummy " organization and may be likened to the dummy 
stockholders previously described. 
The system has since undergone numerous changes. The 



CONTROL COMPANIES 335 

Pere Marquette has been lopped off, and the Cincinnati 
Hamilton and Dayton at one time came under the con- 
trol of the Harriman interests. 

Control Corporations among Public Utilities. — In the 
field of public utilities, which includes water, gas and elec- 
tric works, street railways and telephone and telegraph 
enterprises, the holding control corporation is but little 
less important than among our railroads. 

In this field we find the splendid example of the Inter- 
borough-Metropolitan Company that at one time con- 
trolled through direct ownership of stock the New York 
Railways Company, the Metropolitan Securities Company 
and the Interborough Rapid Transit Company, and in- 
directly through these three some seventeen other com- 
panies, all operating street railways in and about New 
York City. 

The American Telephone and Telegraph Company, also 
operating a public utility, is even more widely known than 
the New York Street Railways combination. This com- 
pany was incorporated under laws of the state of New 
York, in 1885, primarily to construct and operate long 
distance telephone lines for the American Bell Telephone 
Company which owned all of its capital stock. In 1900, 
the charter was amended so as to increase its capitaliza- 
tion and it thereupon acquired by substitution of securities 
all of the capital stock of the American Bell Company by 
giving the stockholders of the latter two of its shares for 
every one of the Bell Company shares surrendered to it. 
The American Bell Telephone Company was subsequently 
dissolved and the American Telephone & Telegraph Com- 
pany assumed its place as head of the great telephone 
system which today owns and controls about 70 per cent 
of the telephone stations and equipment of the country. 

Through a monopoly of the famous Bell patents it is in 
full control of the so-called Bell System. In this system 



336 COMBINATION ORGANIZATIONS 

are the companies directly controlled by the American 
Telephone & Telegraph Company through stock ownership 
and the Associated Bell Companies. The latter operate 
under an arrangement whereby the American Company 
furnishes all needed telephones, replaces them w4th others 
when necessary, grants the right to use all patents owned 
and controlled by it and administers a centralized control 
over the entire system. In return for these services, the 
associated companies pay to the American Company 4| 
per cent of their annual gross telephone receipts. 

In 1911, the American Telephone & Telegraph Company 
acquired the entire capital stock of the Western Telephone 
& Telegraph Company which was dissolved. At about 
the same time it gained control over the Western Union 
Telegraph Company but was forced soon after to relinquish 
its holdings in this concern as the relation was held to be 
in violation of the Sherman Act. 

Beside operating its own lines, this company, in 1919, 
controlled through direct and indirect stock ownership 
some 35 telephone and telegraph companies. It owned 
also 97 per cent of the entire capital stock of the Western 
Electric Company, Inc., whose chief business it is to manu- 
facture the apparatus used in the Bell System, the en- 
tire capital stock of the 195 Broadway Corporation w^hich 
owns the great building housing the main offices of the 
company in New York City, and the entire stock of the 
Electrical Securities & Construction Company that installs 
and operates electrical protective devices and of the Empire 
City Subway Company, Limited, that constructs under- 
ground telephone conduits. The capitalization of the parent 
company consisted of $441,981,200 in stock, $229,403,600 in 
bonds and $90,000,000 in coupon notes. Thus, the whole 
organization had issued altogether well over one billion 
dollars in securities. 

The chart, based on available public information, illus- 
trates merely the essential features of the organization. It 



CONTROL COMPANIES 



337 



omits a number of subsidiaries, such as the Southern New 
England Telephone Company, the Bell Telephone Company 





v> 
















^" 


. 


c^- 


^f 






xr «» 




of Canada and the Cincinnati & Suburban Bell Telephone 
Company. 

Control Corporations among Industrials. — Our in- 
dustrial control corporations exhibit comparatively simple 
lines of control through stock ownership. In this respect 
they resemble quite generally the type exemplified by the 



338 COMBINATION ORGANIZATIONS 

American Telephone and Telegraph organization. As a 
rule they acquire the ownership of all of the outstanding 
stock of their subsidiaries with the exception of such shares 
as are necessary to qualify the directors of these corpora- 
tions under their respective corporation laws. They thus 
partake of the character of incomplete mergers and amal- 
gamations. They retain the corporate entity of the sub- 
sidiary chiefly because it serves to set aside definite pieces 
of property that can be more easily used to support bond 
issues. If the subsidiaries were dissolved it would most 
likely place the head corporation under the necessity of suc- 
cessively hypothecating its collective property when ex- 
pansions were to be undertaken. 

For the same reason industrial as well as other control 
companies usually cause subsidiaries, all of whose stock 
the parent retains, to be incorporated for the purpose of 
constructing and operating new plants. Then, as the work 
progresses, bonds are issued to the public in order to secure 
the necessary capital. Such was the expedient adopted 
by the United States Steel Corporation when, in 1906, it 
caused the Indiana Steel Company to be incorporated to 
undertake the construction and operation of the great steel 
plant at Gary, Indiana ; and likewise when some years later 
it formed the Federal Shipbuilding Company to construct 
and operate a shipbuilding plant at Newark, New Jersey. 

However, industrial holding corporations also frequently 
consolidate two or more of their subsidiaries through mer- 
gers and amalgamations. Consolidations of this type are 
usually undertaken for the purpose of centralizing the ad- 
ministration of plants within a given geographical area or 
locality or in order to centralize control over a number of 
subsidiaries engaged in the same kind of undertaking. 
Here again the United States Steel Corporation furnishes 
some excellent examples. Thus, in 1903, the American 
Steel Hoop Company, the National Steel Company and the 



CONTROL COMPANIES 339 

Carnegie Company were amalgamated into the Carnegie 
Steel Company placing under a single management 
most of the United States Steel Company's plants in the 
Pittsburgh and adjacent Ohio districts. At the same time 
the American Coke Company, the Continental Coke Com- 
pany, the H. C. Frick Coke Company, and McClure Coke 
Company, the Southwest Connellsville Coke Company and 
the United Coal and Coke Company were all merged into 
the H. C. Frick Coke Company. 

A brief description of the control organization of the 
Standard Oil Company of New Jersey and the United 
States Steel Corporation will serve to show the simple form 
of stock ownership control used by industrials. 

The Standard Oil Company of New Jersey was first in- 
corporated in 1882 in compliance with the Standard Oil 
Trust Agreement of that year. In 1890, the Supreme 
Court of the state of Ohio declared the trust agreement 
to be void. However, the dissolution of the trust was not 
carried out expeditiously and it was not until 1899 that 
it may be said to have been completed. In that year the 
charter of the Standard Oil Company of New Jersey was 
amended to enable the company among other things " to 
purchase or otherwise acquire, hold, sell, assign, and trans- 
fer shares of capital stock and bonds or other evidences of 
indebtedness of corporations, and to exercise all the privi- 
leges of ownership, including voting upon the stock so 
held." At the same time the capital stock of the company 
— which since March 19, 1892, had been $10,000,000 — was 
increased to $110,000,000. The purpose of this move was 
essentially to reconstitute the lines of control established 
through the old trust organization by substituting in its 
place a holding corporation. Practically all of the corpora- 
tions and associations that had been parties to the trust 
were thereupon acquired through stock ownership con- 
trol within a short period of time. But the process of ex- 



340 



COMBINATION ORGANIZATIONS 



Name of Company 


Total capital 
stock 


Owned by Stand- 
ard Oil Company 


1. 


Anglo-American Oil Co., Ltd 


£1,000,000 


£999,740 


2, 


Atlantic Refining Company 


$5,000,000 


$5,000,000 


S. 


Buckeye Pipe Line Company 


10,000,000 


9,999,700 


4. 


Chesebrough Manufacturing Co., 








Consol 


500,000 


277,700 


5. 


Colonial Oil Company , 


250,000 


249,300 


6. 


Continental Oil Company 


300,000 


300,000 


7. 


Crescent Pipe Line Company 


3,000,000 


3,000,000 


8. 


Eureka Pipe Line Company 


5,000,000 


4,999,400 


9. 


Galena-Signal Oil Co 


10,000,000 


7,079,500 


10. 


Indiana Pipe Line Company 


1,000,000 


999,700 


11. 


Lawrence Natural Gas Company . . 


450,000 


450,000 


12. 


Mahoning Gas Fuel Company .... 


150,000 


149,900 


13. 


Mountain State Gas Company .... 


500,000 


500,000 


14. 


National Transit Company 


25,455,200 


25,451,650 


15. 


New York Transit Company 


5,000,000 


5,000,000 


16. 


Northern Pipe Line Company 


4,000,000 


4,000,000 


17. 


Northwestern Ohio Natural Gas 








Company 


2,775,250 


1,649,450 


18. 


Ohio Oil Company 


10,000,000 


9,999,850 


19. 


People's Natural Gas Company . . . 


1,000,000 


1,000,000 


20. 


Pittsburg Natural Gas Company . . 


310,000 


310,000 


21. 


Solar Refining Company 


500,000 


499,400 


22. 


Southern Pipe Line Company 


10,000,000 


10,000,000 


23. 


South Penn Oil Company 


2,500,000 


2,500,000 


24. 


Southwest Pennsylvania Pipe Lines 


3,500,000 


3,500,000 


25. 


Standard Oil Company (California) 


17,000,000 


16,999,500 


26. 


Standard Oil Company (Indiana) . 


1,000,000 


1,000,000 


27. 


Standard Oil Company (Iowa) .... 


1,000,000 


1,000,000 


28. 


Standard Oil Company (Kansas) . . 


1,000,000 


999,300 


29. 


Standard Oil Company (Kentucky) 


1,000,000 


997,200 


30. 


Standard Oil Company (Nebraska) 


600,000 


599,500 


31. 


Standard Oil Company (New York) 


15,000,000 


15,000,000 


32. 


Standard Oil Company (Ohio) .... 


3,500,000 


3,499,400 


33. 


Swan and Finch Company 


100,000 


100,000 


34. 


Union Tank Line Company 


3,500,000 


3,499,400 


35. 


Vacuum Oil Company 


2,500,000 


2,500,000 


36. 


Washington Oil Company 


100,000 


71,480 


37. 


Waters-Pierce Oil Company 


400,000 


274,700 



CONTROL COMPANIES 341 

tension of control was not halted until the United States 
Government, in 1910, brought suit in the Circuit Court of 
the United States for the Eastern District of Missouri for 
the dissolution of the combination. The case was taken 
on appeal by the defendants to the United States Supreme 
Court, which, in 1911, upheld the decision of the lower 
court and ordered the Standard Oil Company of New 
Jersey to disposses itself of the stocks of most of its con- 
trolled companies and to refrain from again establishing 
any form of control over them that might be in restraint 
of competition.^ 

At the time of this decree of dissolution, the Standard Oil 
Company held a stock control over some forty corporations 
and a minority interest in two other corporations. Of 
these, thirty-seven were controlled directly by the Standard 
Oil Company of New Jersey as shown on the opposite page. 

Participation in the other five was instituted through the 
medium of the National Transit Company which held a 
controlling interest in three of them and a minority in- 
terest in two- 

The United States Steel Corporation is a pure industrial 
control company whose general features of organization are 
strikingly similar to those of the old Standard Oil Com- 
pany, just described. It was formed in 1901, in New Jer- 
sey, with an authorized capital stock of $1,100,000,000 
made up of equal amounts of common and preferred stock. 

8 Standard Oil Co. v. United States, 221 U. S., 1. 



342 



COMBINATION ORGANIZATIONS 



Under the plan of promotion the corporation was to ac- 
quire, by means of the substitution of securities, the entire 
outstanding stock of the following eleven companies: 



1. Federal Steel Company. . . 

2. National Tube Company. . 

3. American Steel & Wire 

Company 

4. National Steel Company . . 

5. American Tin Plate Com- 

pany 

6. American Steel Hoop 

Company 

7. American Sheet Steel 

Company 

8. Lake Superior Consoli- 

dated Iron Mines Com- 
pany 

9. Shelby Steel Tube Com- 

pany 

10. American Bridge Company 

11. The Carnegie Company. . 



Common 
stock 



$46,484,300 
40,000,000 

50,000,000 
32,000,000 

28,000,000 

19,000,000 

24,500,000 

29,425,940 

8,151,500 

30,527,800 

160,000,000 



$467,989,540 



Preferred 

Stock 



$53,260,900 
40,000,000 

40,000,000 
27,000,000 

18,350,000 

14,000,000 

24,500,000 



5,000,000 
30,527,800 



$252,638,700 



Total 



$99,745,200 
80,000,000 

90,000,000 
59,000,000 

46,350,000 

33,000,000 

49,000,000 

29,425,940 

13,151,500 

61,055,600 

160,000,000 



$720,628,240 



To acquire these securities the United States Steel Cor- 
poration issued $508,227,394 in common stock, $510,205,743 
in preferred stock, $303,450,000 in bonds and assumed 
$80,963,680 in the outstanding bonds of these companies, 
a total of $1,402,846,817 in securities. 

With the exception of the Shelby Steel Tube Company 
each of the eleven companies taken over by the Steel Cor- 
poration was itself a holding company that controlled 
numerous subsidiaries. In the aggregate these were well 
over one hundred in number. In 1902, the corporation 
acquired the $20,000,000 of outstanding capital stock of 
the Union Steel Company ; in 1903, the mergers and amal- 
gamations of subsidiaries previously described were 



CONTROL COMPANIES 343 

effected; in 1904, the Clairton Steel Company was taken 
over and in 1907, the corporation bought nearly the entire 
outstanding capital stock of the Tennessee Coal, Iron and 
Railroad Company. In addition to these acquisitions the 
Steel Corporation has caused several large corporations 
to be organized from time to time to undertake the con- 
struction and operation of new plants. Among these are 
the Indiana Steel Company and the Universal Portland 
Cement Company, in 1906, the Federal Shipbuilding Com- 
pany, in 1917, the Chickasaw Shipbuilding Company, in 
1918, and many others. 

The accompanying chart shows the organization of the 
Steel Corporation as of 1919, as nearly as this can be as- 
certained. In that year it controlled through its eleven 
primary subsidiaries over 160 different companies. Among 
the large units only one, the Federal Steel Company, is 
a pure holding company, while all of the others own in 
fee and operate plants and equipment of one type or 
another. In but very few instances are subsidiaries con- 
trolled through the ownership of less than practically the 
entire amount of outstanding capital stock. Among the 
exceptions are the Pewabic Company, controlled through 
the ownership of 50 per cent of the capital stock, the Pitts- 
burg, Bessemer & Lake Erie Railroad controlled through 
a 52.2 per cent stock ownership, the Pennsylvania & Lake 
Erie Dock Company through 78 per cent stock ownership 
and the Pittsburg Limestone Company. 

While industrial control companies are ordinarily quite 
simple and confine their holdings very largely to business 
undertakings within a given industry, there are, neverthe- 
less, conspicuous exceptions to this general rule. In this 
class are the five great American Packing Companies, 
namely. Swift & Company, Armour & Company, the 
Cudahy Packing Company, Morris & Company and Wilson 
& Company, Inc. They are interested individually and 



344 



COMBINATION ORGANIZATIONS 







S o 5 rf 

- ^^s 



''^ § ^ lr» S 



,Sfoo 
a.-- 

c ^c 



Oc$; 



§11 









o3^ 

0> — CM —to 



CO 5 
.E c c c 



fell 


1 

1 




SMining Companies 
6Transportation Cos. 
5 Manufacturing Cos. 
1 Export Cof7>pany 


i 

a. 

!£ 

en 

c 

o 


ill 

Ill 










1 L_i=d 





si 






5 



5c3 ^^ 



'Sill 

Ll!l| 



111 



C C Q 
«5 S3 




If 



.i CO. 



11^ 

n fe .^ ^ 

< ,1^1 



C 10 l« 
f^CVI — 



=riii 




m 

Hi 

m 





5 ^ 

Mil 



I* ^ 

.5 =«?• 



•5 •> 



CONTROL COMPANIES 345 

jointly in banks, public utilities, railroads, cotton oil com- 
panies, publications and numerous other concerns whose 
activities are technically not pertinent to the packing 
industry. 

The varied interests of E. I. du Pont de Nemours & 
Company present a similar situation. This company was 
organized primarily for the purpose of manufacturing 
powder, explosives and constituent and derivative chemi- 
cals- In 1920 it controlled directly besides several powder 
and chemical companies, a building and construction com- 
pany, a moving picture theater company, a varnish works, 
a hotel company, an engineering concern and an investment 
company. Through the latter company, which is the Du 
Pont American Industries, Inc., the parent concern con- 
trols three other securities companies, one of which owns 
38 per cent of the outstanding stock of the General Motors 
Corporation. This company in turn owns practically the 
entire outstanding capital stock of 46 companies engaged in 
the manufacture of automobiles, parts, accessories, etc., 
and has a large interest in 27 other companies. 

The Control Company in Ocean Transportation. — The 
International Mercantile Marine Company today occupies 
the same position in the field of ocean transportation of the 
world that the United States Steel Corporation occupies 
in the iron and steel industry of the United States. This 
corporation is noteworthy because it controls companies 
chartered in four different countries, namely, the United 
States, Canada, the United Kingdom and Belgium. The 
company itself was incorporated in New Jersey in 1893 as 
the International Navigation Company. This charter 
was amended in 1902 and the name changed to Inter- 
national Mercantile Marine Company. At the same time, 
the authorized capital stock was increased to $120,000,000 
made up of equal parts of common and 6 per cent cumu- 
lative preferred stock. The company then acquired a 



346 



COMBINATION ORGANIZATIONS 



controlling interest in eight marine transportation com- 
panies and a minority interest in several others. Its sub- 




sidiaries and major holdings in other companies, as they 
were reported to have been in 1919, are shown in the ac- 
companying chart. 



CONTROL COMPANIES 347 

The majority of the voting stock was originally held by 
a voting trust. This, however, terminated in 1915, when 
the company was forced into temporary receivership be- 
cause of default in the interest of its mortgage and col- 
lateral trust bonds. By the middle of 1916 the bond- 
holders' claims had been adjusted and control reverted to 
the stockholders. In the same year the company together 
with the American International Corporation, W. R. Grace 
& Company and the Pacific Mail Steamship Company 
purchased the entire plant and assets of the New York 
Shipbuilding Company. The several interested companies 
then caused the New York Shipbuilding Corporation to 
be formed and transferred to it the properties which had 
been acquired. The four companies work under an agree- 
ment whereby the tonnage constructed by their shipbuild- 
ing corporation is apportioned among them and is paid for 
on a cost-plus-a-percentage plan. The Mercantile Marine 
Company also owns the office building at Number 1 Broad- 
way in New York City, which is managed through a sub- 
sidiary. 

A similar organization — financially less important, but 
more extensive in the number of companies controlled — 
is the Atlantic, Gulf and West Indies Steamship Lines. 
This company was incorporated in Maine, in 1908, and 
took over certain properties of a defunct corporation. Sub- 
sequently it acquired practically the entire outstanding 
stock of some nineteen steamship and wharf companies 
operating along the Atlantic coast and in the Gulf of 
Mexico, including several oil producing companies in 
Mexico. But few of its subsidiaries are alien corporations. 

Mercantile Control Companies. — In the mercantile field 
various attempts have been made to build up extensive re- 
tail stores organizations through the medium of the con- 
trol company. The early attempts in this direction were 
failures. This was notably the case with the old H. B, 



348 COMBINATION ORGANIZATIONS 

Clafiin & Company, a corporation which stood at the head 
of a combination of department stores. However, there 
are today several control companies that are operating 
successfully in this general field. Most of them are of 
recent formation. 

The American Druggists' Syndicate incorporated in 1910, 
in New York, now controls some ten active and six inac- 
tive corporations through ownership of practically all of 
their outstanding stock. The United Drug Company, or- 
ganized in Massachusetts, in 1916, with an authorized 
capital of $65,000,000 controlled, in 1920, some fifteen cor- 
porations with a total authorized capital stock of 
$31,584,000. 

A somewhat more recent mercantile control corporation 
is the United Retail Stores Corporation, formed in Dela- 
ware in 1919, with an authorized capital consisting of 
160,000 founders' shares of no par value, 1,000,000 
shares of class ^' A " common stock of no par value and 
$10,000,000 eight per cent accumulative preferred stock. 
This corporation controls the United Cigar Stores Company 
of America, the U. R. S. Candy Stores, Inc., Fuerst & 
Kraemer Company, Gilmers Inc., and Montgomery Ward & 
Company, Inc. 

In the dry goods trades there are also several such or- 
ganizations. Among these may be mentioned the Asso- 
ciated Dry Goods Corporation, incorporated in Virginia in 
1916, that controls some fourteen other companies, and 
the Mercantile Stores Company, Inc., formed in Delaware, 
in 1919, as a reorganization of the Mercantile Stores Cor- 
poration whose properties consisted chiefly of all, or of the 
major part, of the outstanding stocks of some twenty-four 
dry goods and manufacturing companies. 

The Control Company in Other Countries. — The con- 
trol company is characteristically American and has not 
come into general use in Europe. A few are to be found in 



CONTROL COMPANIES 349 

England, France, Germany, Holland and Switzerland, but 
even many of these are developments of American enter- 
prises. The reason for this condition may very largely be 
attributed to the use of other instrumentalities of combina- 
tion such as trusts and kartells which are generally illegal 
in the United States. Through these a partial control can 
be exercised. If complete control is desired, this may be 
obtained through consolidation or outright absorption. 
Among the larger European concerns that may properly be 
called control companies are the Allegemeine Electrizi- 
tatsgesellschaft (General Electric Company of Germany), 
the Schaaffhausenscher Bankverein (a German potash 
combination) , the Swiss Aktiengesellschaft fiir Unternehm- 
ungen der Textilindustrie, the De Beers Consolidated 
Mines, Limited and the Car Trust Realization Company,^ 
of England, the Compagnie generale d'Electricite, of 
France, and the Compagnie generale des Nitrates, of 
Belgium. 

As a result of the industrial breakdown arising out of 
the war, there is now in evidence a general movement, that 
is especially strong in the central European countries, to- 
ward a more extensive use of this type of ownership organi- 
zation. Nevertheless, it is doubtful whether this type of 
company will attain there the pre-eminent position that 
it holds in the United States. 

Advantages and Weaknesses of the Control Company. — 
The reason for the very extensive use of the control com- 
pany in the United States for purposes of business owner- 
ship is found to lie in the inherent advantages that this 
form of organization offers. These may not, however, be 
considered abstractly, for they are but the reflection of 
the background of the economic, political and judicial 
structure of the United States. To this background do they 
owe their existence. Were it to be altered, it might deprive 
^ The Car Trust Realization Company is a joint stock company. 



350 COMBINATION ORGANIZATIONS 

them of certain advantages that they now possess, or even 
do away with them entirely. With this point in mind, we 
may turn to a consideration of some of the more promi- 
nent advantages. 

(1) The holding company is admirably adapted to the 
formation of horizontal as well as vertical combinations. 
In this particular it differs materially from the federation 
organizations such as the pool, the kartell and the syndi- 
cate. It is hardly necessary to dwell upon this feature. 
We have seen from the examples given that most of our 
larger control companies link together long chains of like 
as well as unlike companies. While the American Tele- 
phone and Telegraph Company, the International Mer- 
cantile Marine Company, the United Retail Stores 
Company and others are characteristically horizontal com- 
binations, they, nevertheless, have also reached backward 
or forward to include in their organizations concerns oper- 
ating in preceding or succeeding stages of industrial ac- 
tivity. Thus we find the Western Electric Company, the 
Empire City Subway Company and the 195 Broadway 
Corporation among the controlled companies of the Ameri- 
can Telephone and Telegraph Company, and the New York 
Shipbuilding Company jointly controlled by the Interna- 
tional Mercantile Marine Company and others. On the 
other hand, it requires but a cursory inspection of the 
chart depicting the organization of the United States Steel 
Corporation in order to enable one to grasp the extent to 
which not only integration but also horizontal combination 
has been effected through the medium of the control com- 
pany. Here we find controlled companies that respec- 
tively produce the coal, the iron ore, the limestone, that 
operate blast furnaces, steel converters, rolling mills and 
plants for the manufacture of finished products ; that oper- 
ate railways, docks and steamers, and even the United 
States Steel Products Company, which handles the export 



CONTROL COMPANIES 351 

trade of all of that corporation's subsidiaries. Due to the 
facility with which combination in either direction may be 
carried out, the control company has unlimited possibilities 
in the direction of monopoly, a fact that is well attested 
by the numerous cases that have been brought before our 
courts under the Sherman Anti-Trust Act seeking to force 
a dissolution of these combinations. 

(2) It lends itself readily to centralization of control 
along functional or technological lines. We saw, for ex- 
ample, in the reorganizations effected within the United 
States Steel Corporation, how this company used the H. C. 
Frick Coal & Coke Company to centralize control over 
its coal mining and coke manufacturing subsidiaries, how 
most of its iron mines are under the control of the Lake 
Superior Consolidated Iron Mines and how its manufactur- 
ing plants, railroads, steamship companies, etc., are con- 
trolled through separate corporations. The organizations 
created by the five great packers also furnish us with many 
fine illustrations of this practice. Its advantage lies in the 
opportunity that it affords for the development of spe- 
cialists in the several functions and for the advancement of 
technique in production. 

(3) It fits ideally into the scheme of multiplicity of 
legislative jurisdictions which is such a prominent feature 
of our political organization. The direct ownership by a 
single corporation of business establishments scattered 
throughout several states is objectionable. In all but one 
of those states it must needs be a foreign corporation, and 
in each one, it is subject to special laws governing its 
entry for business purposes. It is there discriminated 
against in favor of domestic corporations. To avoid these 
difficulties, the control company has been successfully em- 
ployed. The Southern Pacific Railroad System was or- 
ganized with this point in mind, as its California, Arizona, 
New Mexico and Texas subsidiaries will testify. The 



352 COMBINATION ORGANIZATIONS 

American Telephone and Telegraph Company, the Cities 
Service Company, the General Electric Company and hosts 
of others also take cognizance of this fact. 

(4) It is usually in a position to take advantage of its 
competitors in marketing its product. This advantage 
tends to be greatest when the control company has attained 
a commanding position in that field of industry in which it 
operates. It may then organize " bogus independent con- 
cerns " like those used by the E. I. du Pont de Nemours 
Company, the American Tobacco Company, the National 
Cash Register Company, the International Harvester Com- 
pany and numerous others. But quite aside from this 
feature, large scale production and monopolistic or semi- 
monopolistic position in the industry, so common among 
our larger holding companies, put them in command of 
many forms of unfair competition that smaller concerns 
cannot use with a like degree of success. ^^ In fact, so com- 
mon has the use of unfair methods of competition by con- 
trol companies become that certain sections of the Clayton 
Amendment to the Sherman Anti-Trust Act, passed in 1914, 
aim directly at their suppression. 

(5) Financial advantages also are outstanding features 
of this form of organization. There is inherent in the con- 
trol company the device that is known as making the enter- 
prise pay its own purchase price. Thus, when in 1913, the 
United Drug Company decided to go into the cigar busi- 
ness in competition against the United Cigar Stores Com- 
pany, the latter countered by going into the drug business. 
It purchased control of the Riker & Hegeman Company 
for $3,000,000. Thereupon, it organized a new company 
under the laws of the state of Delaware to which it turned 
over the control of the Riker & Hegeman Company. It 
retained 52 per cent of the stock of this new company and 
sold the rest, which netted it some $2,400,000. In this way 

10 See W. H. S. Stevens, Unfair Competition. 



CONTROL COMPANIES 353 

the control t^at it originally purchased for $3,000,000 cost 
it but $600,000. Similar methods were employed in or- 
ganizing the United States Shipbuilding Company and the 
Corn Products Company .^^ Another financial advantage 
comes out of the fact that, by proper selection of classes 
of securities coupled with the use of pyramided control, it is 
possible for a few financiers to command enormous amounts 
of invested capital. This was well illustrated by such ex- 
amples as the Rock Island Company and the Atlantic 
Coast Line, discussed above. 

(6) The ease with which combinations bound together 
through a control company may be dissolved may also, 
under certain circumstances, prove to be an advantage. 
Many of our larger combinations have been declared by the 
courts to be in violation of anti-trust statutes and have 
been ordered to dissolve. Had they been organized on the 
principle of fusion it might have meant considerable loss 
to them. However, under the control form of organization 
the sale of part of the securities held was sufficient to 
comply with the court's orders. This method of dissolu- 
tion as frequently as not proves to be a profitable venture 
for the stockholders of the dissolved concern. At least such 
was the result in the case of the sale of the Southern Pacific 
stock by the Union Pacific Railroad Company. This form 
-of organization consequently injects a high degree of vendi- 
bility into invested capital which under present day indus- 
trial conditions appears to be one of the fundamental 
requirements of a good ownership organization. 

Weaknesses of the Control Company. — The advan- 
tages of the control company are in part offset by certain 
weaknesses. In general, these are of two types, first those 
that pertain directly to the administration of the enterprise 
and second, those that affect the investor adversely. 

11 For an account of these promotions see Dewing, Corporate 
Promotions and Reorganizations. 



354 COMBINATION ORGANIZATIONS 

(1) The administrative weaknesses arise out of the prin- 
ciple of legal entity which applies to all of the controlled 
companies. Each one of these companies must run its own 
business; it must elect its own officers and directors, keep 
its own accounts, make its own reports, pay its own taxes, 
etc. To be sure, much of it is ordinarily reduced to a mini- 
mum and is carried on perfunctorily merely to meet the 
requirements of the law. But even so, in a large control 
company that has many subsidiaries, this duplication of 
administrative details must necessarily increase the operat- 
ing expenses. 

(2) From the standpoint of the investor, the control 
company's greatest defect is the difficulty of ascertaining 
the value supporting its securities. We have already seen 
how the practice of over-capitalization has brought about 
a condition that has reduced the outstanding securities, at 
their par value, to nothing more or less than a pure fiction. 
If the investor is to formulate any judgment as to thei 
soundness of the enterprise he must necessarily investigate 
the condition of each of the controlled subsidiaries. This 
of itself would be an enormous task, even if he could se- 
cure complete reports of their financial standing, which, 
however, is usually impossible. Then too, the dispersion 
of holdings among a vast multitude of stockholders makes 
it very easy for a few large stockholders, or a voting trust, 
to gain control over the company although they may own 
but a minority of its stocks. The multiplicity of securities 
also tends to bring about a lack of unity of interest in the 
body of security-holders. The interest of the bondholders, 
preferred stockholders, and common stockholders are fre- 
quently diametrically opposed on many points, with the 
result that each group is continually fighting the others to 
better its position. 

But after all, it is not so much the structural weaknesses 
that have brought our great control companies into such 



CONTROL COMPANIES 355 

bad repute as it is the laxness of the laws under which they 
have been formed that permit of financial manipulation, 
the tendency toward the establishment of a monopolistic 
position in industry, and the use by them of many question- 
able and unfair practices through which they seek to break 
down competition. 



CHAPTER XVIII 
FINANCE AND ASSUMPTION COMPANIES 

The legal requirements governing the formation of 
securities-issuing companies, as well as the peculiar 
economic conditions with respect to promoting and financ- 
ing that are to be found in certain industries, are very' 
largely responsible for the existence of the so-called finance 
companies and the closely related assumption companies. 

Promotion. — In the broadest sense of the term, pro- 
motion is comprised of the following steps: 

(1) First, the idea for the new undertaking must be weighed 
in the balance and its feasibility investigated and de- 
termined. 

(2) Next the enterprise must be assembled; namely, options 
must be secured on such properties, patents, rights, etc., as 
it is thought desirable to include in the undertaking. 

(3) Then arrangements must be made whereby the securities 
may be issued in exchange for capital in the form of cash 
or credit wherewith to acquire the properties that are 
to be taken over. 

(4) And in the meantime, the legal steps of obtaining a charter 
and of providing an administrative organization for the 
corporation must be attended to. 

Of all these, it is usually the third step that presents the 
greatest obstacle to the successful promotion of a large 
corporate business enterprise. In a small enterprise, those 
who undertake it usually subscribe all of the capital that 
is necessary. However, in a large enterprise, whose capi- 

356 



FINANCE AND ASSUMPTION COMPANIES 357 

tal requirements run into millions of dollars, special ar- 
rangements must be made with persons or companies that 
have sufficient ready cash available, or are in a position to 
borrow it, to supply the corporation's need of funds. This 
may be done in two ways — (1) the securities may be 
offered for subscription directly or through jobbers and 
brokers to the public, or (2) they may be turned over in 
large blocks to underwriting syndicates or finance com- 
panies. In the latter case, the company is being financed. 

What Constitutes Financing a Company. — The work of 
the underwriting syndicate may be divided into two sets 
of transactions. In the first place, it contracts with the 
corporation or the promoters to furnish a definite sum of 
money within a definite time limit in exchange for the 
securities that it underwrites. It thus agrees to supply all, 
or at least a large part, of the investment capital necessary 
to establish the enterprise. In the second place, the syndi- 
cate seeks to sell the underwritten securities to the public 
in order to secure new funds for further operations. In 
this transaction it may either make a profit by selling at 
a higher price per share than it gave for the securities, or 
lose heavily if the public does not buy. Ordinarily the 
syndicate can complete its work and recover its funds from 
the public within a relatively short period of time, but fre- 
quently the securities must be held bj^ it for years or until 
the corporation shows some tangible prospects of success. 

In practically all English-speaking countries under- 
writing, to the exclusion of nearly all others, has become 
practically the only method now generally employed in 
promoting the larger enterprises. For this reason, the 
term " financing the enterprise " has been construed to 
include both of the transactions described above. However, 
since modern organizing ability has succeeded in develop- 
ing specialized companies that confine their activities 
essentially to one or the other of them, it will be necessary 



358 COMBINATION ORGANIZATIONS 

to differentiate. Consequently, for the purpose of this 
chapter, the term financing connotes the supplying of capi- 
tal in the form of investable funds in exchange for securi- 
ties, while the process of throwing off the securities 
acquired through financing transactions will be referred to 
as emission of securities. And correspondingly we have 
finance organizations to do the financing and securities- 
assumption companies to assist them by relieving them oi 
the securities acquired through finance operations. 

Special Finance and Assumption Companies. — Under 
modern conditions financing is done by four agencies, 
namely, (1) -by banks and trust-companies, (2) by in- 
dustrial corporations, (3) by special finance companies, 
and (4) by the state. The latter need not be considered. 

Not all banks participate in finance operations. It is a 
risky business, and in order to protect depositors our fed- 
eral reserve and state banks are, for the most part, pro- 
hibited by law from engaging in it. In the United States, 
therefore, the trust companies and the private banking 
associations perform this work by becoming members of 
underwriting syndicates. Over-participation in such ven- 
tures has been the direct cause of the failure of several 
large trust companies, notably of the Knickerbocker Trust 
Company, the Trust Company of the Republic and the 
Merchants Trust Company of New York. These found 
themselves in a position in which their funds were so 
tied up in securities upon which they could not realize that 
they were unable to meet the withdrawal demands of their 
depositors. 

In England, immediately after the passage of the Limited 
Liability Act of 1862, a great number of the so-called 
" financial companies " sprang up. These companies 
usually accepted deposits or loans and conducted their 
finance operations with borrowed funds. At first they 
assisted in the reorganization of joint stock companies, 



FINANCE AND ASSUMPTION COMPANIES 359 

partnerships and individual proprietorships into corpora- 
tions with limited liability and at a later period financed 
many of the trust companies and investment companies. 
In France, the famous Credit Mobilier seems to have been 
the forerunner of this type of institution which is at the 
present time represented there by the '" banques de credit " 
and the " banques d'affaires " that exist in considerable 
numbers. In Germany, they have their counterpart in the 
" Effekstenemi^issionsbanken," also called " Emissions- 
banken." 

These institutions differ from the true finance company 
in that they work very largely with the funds of their de- 
positors and not, as do the latter, with their own funds. In 
most cases they appear not to have been very successful 
in their finance undertakings. Many have gone out of 
business altogether, others have become investment com- 
panies and still others deposit and trust companies. 

Industrial corporations frequently are strong enough 
financially to finance their newly created subsidiaries with- 
out having to resort to outside agencies. Thus, w^hen in 
1906, the United States Steel Corporation decided to erect 
the great steel plant at Gary, Indiana, it organized the 
Indiana Steel Company with an authorized capital stock 
of $50,000,000 and financed the undertaking to a large ex- 
tent out of its own earnings, for only about $20,000,000 of 
outside capital was secured through bond issues. This 
practice is also extremely common among the electrical 
equipment manufacturing concerns and those that con- 
struct gas works, water works and street railways, etc. 
The same thing is true of land development, exploration, 
mining and tropical exploitation companies. 

Special Finance and Assumption Companies. — The 
special finance companies are those that have been created 
especially for the purpose of financing other companies. 
They are usually more or less permanent and in this respect 



360 COMBINATION ORGANIZATIONS 

differ radically from the underwriting syndicates which are 
temporary and confine their operations ordinarily to a 
single venture. They may be classified in two ways, that 
is to say: (1) they may undertake general finance opera- 
tions without reference to lines of industrial demarkation 
or they may specialize in enterprises of a particular in- 
dustry and (2) they may themselves be independent com- 
panies or subsidiaries of banks or industrials, formed to 
finance other subsidiaries founded by the parent company.^ 
In order to be successful, a finance company must have 
some means of throwing off the securities that it has ac- 
quired through its operations in order to obtain new capital 
to continue its financing; otherwise it will becorne merely 
an investment company after its original capital is 
exhausted. The company may, of course, attempt to sell 
the securities it holds to investors. But there is a practical 
difficulty militating against this procedure; this is the 
fact that most of the enterprises that have been financed 
frequently do not begin to show profits for some years 
immediately following their formation. Hence, these 
securities, ordinarily, must be sold, if at all, at a loss. To 
avoid this, the finance companies usually resort to the prac- 
tice of substitution of securities which they employ either 
directly or indirectly. In carrying out the direct method, 
the company selects the better securities from among its 
holdings and pledges these as collateral in support of an 
issue of bonds or notes which are sold to the public. The 
money thus secured is then used for further finance opera- 
tions. In availing itself of the second method, the company 
causes a new company to be formed, and an agreement is 
entered into with it, whereby the new one is obliged to take 
from the finance company such securities as the latter de- 
sires to rid itself of. The new company pays for the securi- 

1 In this connection see also the chart on page 364 which shows 
the close inter-relation between the great financial concerns of the 
United States and the railroad and equipment companies. 



FINANCE AND ASSUMPTION COMPANIES 361 

ties with original capital or with money obtained from bond 
or note issues secured by a pledge of the securities that it 
assumes. Companies of this type are securities-assumption 
companies. They may be either independent companies, 
or subsidiaries of the companies whose securities they agree 
to assume, but the latter is more frequently the case. 

While finance and assumption companies are character- 
istically European institutions, occurring in very large 
numbers particularly in Germany, there are, nevertheless, 
many excellent examples in the United States. A descrip- 
tion of some of those found in this country will serve to 
explain their uses and inter-relations. 

American Finance and Assumption Companies. — The 
contrast in methods of financing subsidiaries that are 
being used by the two largest electrical manufacturing and 
constructing companies of the United States illustrates in 
an admirable way the use that can be made of finance and 
assumption companies. The two companies referred to 
are the Westinghouse Manufacturing Company and the 
General Electric Company. The former has consistently 
followed the practice of financing its subsidiaries directly 
while the latter has made extensive use of finance and 
assumption companies. 

The Westinghouse Company's plan, in brief, has been to 
take as payment the notes and bonds of companies that it 
has fitted up with electrical equipment. These notes and 
bonds are usually secured by the stocks and plants of the 
companies. Thus, while these companies were not organ- 
ized as subsidiaries they, nevertheless, remained under the 
control of the Westinghouse Company until they had paid 
off their obligations. 

The effect on the company of this direct method of 
financing is well shown by the great increase in the amount 
of certain items of its balance sheets. These items are 
investments in securities of other companies, fixed assets, 



362 



COMBINATION ORGANIZATIONS 



notes payable, funded liabilities including bonds and notes 
outstanding and capital stock outstanding. 



Items 


March 31 
1897 


March 31 
1903 


Oct. 31 
1907 


Investments 

Fixed assets . . . 


$6,820,952 

14,350,735 

1,606,658 

1,134,560 

12,401,664 


$7,407,716 

20,179,121 

6,524,000 

3,054,000 

18,129,150 


$29,491,736 
49,370,121 


Notes payable 

Funded liabilities 

Capital stock 


9,209,766 
29,171,702 
27,936,815 



The great increase in the amount of investments repre- 
sented by securities of financed companies indicates that 
the company was obliged to hold these securities for some 
years before it could profitably dispose of them. To carry 
this burden in addition to growing plant requirements the 
company resorted to increasing steadily its capitalization. 
Its capitalization, which includes funded liabilities and 
capital stock, rose from about $13,500,000 in 1897 to over 
$57,000,000 in 1907 while the fixed assets, plant and equip- 
ment, etc., increased from about $14,350,000 to $49,370,000. 
At the same time the funded liabilities and notes payable 
increased from $2,740,000 to $38,380,000, most of which 
was used to secure new capital for financing operations. 
During the credit stringency of 1907 the company was 
forced into the hands of a receiver in order to straighten 
out its finances.^ 

The General Electric Company, on the other hand, met 
a similar situation successfully by establishing two sub- 
sidiaries, namely, the Electrical Securities Corporation and 
the Electric Bond and Share Company. The former is 
essentially an assumption company and the latter a finance 
company. 

The Electrical Securities Corporation was formed in 1904 
by the General Electric Company in the State of New 

2 See Dewing, Corporate Promotions and Reorganizations. 



FINANCE AND ASSUMPTION COMPANIES 363 

York. In 1919, its capitalization consisted of $2,500,000 
common stock, all held by the parent company, $1,000,000 
in five per cent cumulative preferred stock and $4,181,000 in 
five per cent collateral trust bonds. When the parent com- 
pany finances a subsidiary directly it receives the stocks 
and bonds of the subsidiary in payment for the equipment 
sold to it. These securities are then turned over to the 
Electrical Securities Corporation which pays the General 
Electric Company for them out of the proceeds of issues 
of collateral trust bonds that it sells to the public. These 
bonds are supported by placing the securities received in 
the hands of a trustee as a trust fund. The Securities Cor- 
poration receives its income from three sources: first, from 
profits derived from the sale of securities, which, in 1909, 
reached nearly $850,000, but varies greatly from year to 
year; second, from dividends declared on the stocks that 
it holds, which show a more or less steady decline since 
1911; and third, from interest on bonds held, which is its 
steadiest and in the aggregate its greatest source of revenue. 
It, thus, continues operation through the principle of sub- 
stitution of securities, absorbing securities of subsidiaries 
of the General Electric Company and issuing its own 
securities in the form of bonds to the public. Dating from 
the time of its formation in 1904, it had sold to the public 
fourteen series of collateral trust bonds of which $4,181,000 
were outstanding at the close of 1919. 

The Electric Bond and Share Company is a subsidiary 
finance company of the General Electric Company. It 
was organized by the latter, in New York, in 1905. In 
1919, it had outstanding $10,000,000 of common stock, all 
held by the parent company, and $9,700,000 of preferred 
stock held by the public. This company carries on its own 
finance operations directly, purchasing the bonds and 
stocks of electrical and other undertakings that it has or- 
ganized to make a market for the products of the General 



364 COMBINATION ORGANIZATIONS 

Electric Company. From time to time, it has caused a 
number of assumption and control companies to be formed 
in order to relieve it of its ever-growing supply of invest- 
ment securities. By 1919, it had seven such companies 
under its control and through them controlled several score 
of others. It not only financed these companies, but con- 
solidated and reorganized them and continues to act as 
fiscal agent for them. 

The character of its subsidiary assumption and control 
companies may be seen from a brief description of the 
American Power and Light Company. This company was 
formed in 1909 by the Electric Bond and Share Company 
to take over the control, through stock ownership, of com- 
panies that the latter had previously financed, namely, the 
Kansas Gas and Electric Company, the Portland Gas and 
Coke Company, the Pacific Power and Light Company, 
the Nebraska Power Company, and the Southwestern 
Power and Light Company. These companies supply elec- 
tric light and power to 205 communities, artificial gas to 
32 communities, natural gas to five communities, street 
railway service to three communities, water service to seven 
communities, interuban service to five communities and ice 
service to two communities. 

The accompanying diagram shows the inter-relations 
existing between the General Electric Company and the 
finance and assumption companies here mentioned. 

The Cities Service Company, incorporated in Delaware 
in 1910, and which now controls 80 gas, electric light, heat, 
water, power and traction companies and 25 oil-producing 
and refining companies, also uses finance companies i 
building up its subsidiaries. One of these is the E!^ .Ac 
Bond Deposit Company, formed in Delaware in 19i^. Its 
first financing venture consisted of assuming $491,000 first 
mortgage bonds, $500,000 preferred stock, and $262,000 
common stock of the Ozark Power and Water Company 



FINANCE AND ASSUMPTION COMPANIES 365 

to enable the latter to finance and develop a 15,000 horse- 
power hydro-electric project near Forsyth, Missouri. It 



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had outstanding, in 1919, $3,000,000 in stock made up of 
equal amounts of common and preferred, nearly all of 
which is owned by the Cities Service Company. 



366 COMBINATION ORGANIZATIONS 

Another interesting example of the finance company in 
the field of public utilities is the Gas and Electric Securities 
Company, organized in Delaware in 1910, by the Henry L. 
Doherty interests. It is essentially a finance and not a 
control company, and was organized primarily to promote 
and finance the Cities Service Company, mentioned above, 
but it does not now control this company. Its operations, 
at the present time, consist of financing the subsidiaries 
of the Cities Service Company and other enterprises pro- 
moted by the Doherty Organization. In order to secure 
the close cooperation between these several companies that 
is necessary in successful finance undertakings, a carefully 
worked out plan of interlocking directors is employed. 

A few finance companies are also to be found in the field 
of mining, development and exploration. For example, 
the West India Sugar Finance Corporation, formed in 
Connecticut in 1913, finances sugar companies in the West 
Indies by making advances to them secured by mortgages, 
securities, and liens on growing crops. In 1919, it held 
$7,000,000 of gold bonds and $759,165 in stocks of four 
sugar companies located in Cuba and Porto Rico. In order 
to supervise somewhat the conduct of companies that it has 
financed or supplied with credit, it usually provides for 
representation on the board of directors. It is not a pure 
finance corporation in so far as it also makes loans without 
enlisting the principle of substitution of securities. 

Specialized, as well as general, finance companies are 
to be found among mining, land and development enter- 
prises. An example is the Smelters' Securities Company, 
a subsidiary of the American Smelting and Refining Com- 
pany. But these companies frequently develop into gen- 
eral finance companies by extending their operations to 
include a great variety of undertakings. Such a company 
is the Exploration Company, Limited, originally organized 
in England with an authorized capital stock of £375,000. 



FINANCE AND ASSUMPTION COMPANIES 367 

By 1919, it had promoted and financed such diversified 
enterprises as the South African Real Estate Trust, Ltd., 
the Exploration Company of England and Mexico, Ltd., 
the El Oro Mining and Railway Company, Ltd., the Suchi 
Timber Company, Ltd., the Santa Rosa Mining Company, 
Ltd., and the Tom Boy Gold Mining Company. It serves 
also as a control company. 

The American International Corporation was formed in 
New York in 1915 to promote and develop the foreign trade 
of the United States. It carries on in its own name only 
general supervisory and research activities, but it also par- 
ticipates in six foreign trade companies through invest- 
ments in their securities and controls subsidiary companies 
to carry on trading and finance activities and others to 
manage its affairs in foreign countries. The activities of 
the finance companies are described as " Development 
undertakings, governmental or private, at home or abroad, 
which usually involve the purchase of securities to provide 
funds for carrying on the work and also the supervision 
of the work during its progress." The more important of 
these finance companies are the China Corporation, formed 
in 1916, to hold, develop, sell or otherwise dispose of any 
rights, francjiises, concessions, etc., and to enter into con- 
tracts of all kinds with governments, corporations and in- 
dividuals; the Siems-Carey Railway & Canal Company, 
to construct and operate canals, waterways, irrigation 
systems, railroads, railways, telephone and telegraph lines, 
etc., in foreign and domestic countries, and the Latin 
American Corporation, to promote and finance under- 
takings and enterprises in South America and to see them 
through the formative period. It is quite obvious that the 
American International Corporation is, thus, prepared to 
undertake through subsidiaries general finance operations 
covering a whole array of industries. 

There are also a few other excellent examples of assump- 



868 COMBINATION ORGANIZATIONS 

tion companies in the United States. Among these may be 
mentioned the St. Lawrence Securities Company and the 
American Pipe & Construction Securities Company. The 
former was organized in 1906, as a subsidiary of the 
Aluminum Company of America, to relieve the parent com- 
pany of the securities of the St- Lawrence River Power 
Company and three others. It, thus, combines the func- 
tions of assumption and control. The other company was 
organized in 1916, by the American Pipe & Construction 
Company to relieve the latter of securities that it had re- 
ceived in payment for water works, gas plants, electric 
light and power plants and street railways constructed for 
subsidiary and other corporations. The Construction 
Company sold to the Securities Company bonds to the face 
value of $7,000,000 and received in return $3,000,000 in 
stock and $3,000,000 in 6 per cent collateral trust bonds of 
the Securities Company. It then sold the preferred stock 
and the bonds to acquire new capital, but retained control 
of its new subsidiary through the common stock. 

Finance and Assumption Companies in Gerinany. — 
While there are but few finance and assumption companies 
in the United States and England, they are as common in 
some of the countries of Continental Europe as they are 
rare with us. This is particularly true of Germany, and 
of such countries as have adopted corporation laws 
patterned after those of that country. 

The German law well illustrates the influence that legis- 
lation may exercise in molding the form that advanced 
types of ownership organization shall take. Elaborate 
provisions have been made to insure the genuine nature 
of the valuation of the original assets. The starting of a 
business corporation with an insufficiently subscribed capi- 
tal is also prevented through a provision requiring that 
the corporate existence of a company can not possibly begin 
before its whole capital has been subscribed, and before 



FINANCE AND ASSUMPTION COMPANIES 369 

at least 25 per cent of the authorized capital stock, payable 
in cash, is in the actual possession of the managers. The 
law provides for two modes of forming a company: 
(1) the simultaneous method, whereby the promoters take 
up the whole authorized capital stock and offer it to the 
public after the formation of the company; (2) the sue- 
cessive method, whereby the promoters are permitted to 
offer the shares to the public for subscription before the 
registration of the company; but in either case the whole 
of the authorized capital stock must be subscribed to before 
the corporation can begin business. However, the succes- 
sive method of promoting is very rarely employed because 
of the requirements laid down by the Stock Exchange 
Statute of 1896. This law prescribes: (1) The compul- 
sory issue of a prospectus, the authors of which are under 
an especially stringent liability; (2) the lapse of a space 
of time between the incorporation of the company and the 
public issue of its securities, in so far as the securities are 
not negotiable on any authorized exchange unless at least 
one year has elapsed from the date of registration of the 
company and unless the first yearly balance sheet of the 
company has been published together with the profit and 
loss account, and (3) the fixing of a minimum authorized 
capital for companies whose securities are to be dealt in 
on the exchanges. 

While the successive method of formation has, under 
English and American law, become practically the only 
method of forming corporations, in Germany it is so 
hemmed in by exacting statutes that it is avoided when- 
ever possible. The most practical method of formation 
in that country, therefore, is to have all of the capital stock 
subscribed to and the full capital paid in at once. This, 
coupled with the waiting period required by the Stock 
Exchange Law, not only makes it necessary to finance the 
companies, but also effectively prevents a quick reconver- 



370 COMBINATION ORGANIZATIONS 

sion into cash of the securities purchased in finance opera- 
tions. These difficulties have been satisfactorily overcome 
through the acceptance, by the German banks, of a large 
portion of the financing burden and by the establishment 
of large numbers of securities assumption and of finance 
companies. As a result, these two types of securities- 
substitution companies are as characteristic of the indus- 
trial organization of Germany as is the control company 
of the American system. These finance companies are 
either independent companies or subsidiaries of one or more 
other concerns; and they may undertake to finance all 
kinds of industrial enterprises or confine their operations 
to given industries. The assumption companies, of course, 
are ordinarily closely connected with, and usually con- 
trolled by, the companies, or banks, that turn over their 
holdings in securities to them- 

Independent finance companies are by no means as 
numerous as are those that have been formed by industrial 
concerns in conjunction with banks as subsidiary com- 
panies. It is also characteristic of them that they usually 
confine their financing operations to undertakings within 
a given industrial field, rather than to broaden their scope 
of activity to industry in general. Many of them prefer 
to call themselves banks, like the " Bank flir Napthain- 
dustrie " and the " Bank fiir Brauindustrie," although 
technically they possess none of the characteristics of true 
banks other than the extension of loans on mortgage bonds 
and stocks as security. Of the few general independent 
finance companies whose history is known to us, the 
Aktiengesellschaft fiir Rheinisch-Westfalische Industrie 
is perhaps the most prominent. This company, according 
to Dr. Liefmann,^ was organized in Germany, in 1871, as 
an investment company, but soon became engaged in 
financing. It founded successively the Gelsenkirchen- 

3 Robert Liefmann, Beteiligungs-und Finanzierungsgesellschaften. 



FINANCE AND ASSUMPTION COMPANIES 371 

Schalker gas and water works, a paper factory, numerous 
mining companies, assisted in financing a cement factory, 
an industrial chemical company, a wooden-ware manufac- 
turing company and a mirror factory, and acquired also 
an important investment interest in a brewery, a boiler fac- 
tory and development undertakings. From 1884 to 1900, 
its dividends fluctuated between 3 and 60 per cent, but 
since that time it has frequently failed to declare a divi- 
dend. This may have been, in part, due to the fact that 
it made no dose connection with assumption companies to 
which it might turn over its securities, but sold them 
outright. 

The non-independent, or affiliated, finance companies are 
ordinarily organized by the larger industrial concerns in 
conjunction with banks. Thus, in 1894, Ludwig Lowe 
& Company and Bleichroder, Born & Busse, being in need 
of funds to finance certain electrical undertakings, that 
they were equipping with machinery, etc., enlisted the aid 
of three banks, the Diskontogesellschaft, the Dresdener 
Bank and the Darmstadter Bank. These five concerns, 
together, formed the Gesellschaft fiir Elektrische Unter- 
nehmungen and supplied it with capital to finance the new 
enterprises. 

Frequently, the industrial concern is itself financially 
strong enough to build up its own finance companies. In 
1897, the Allgemeine Elektrizitats Gesellschaft (General 
Electric of Germany) acquired a Swiss company, the Bank 
fiir Elektrische Unternehmungen, which it has since used 
very effectively to finance several score of companies. 

The more important holdings of the Bank fiir Elektrische 
Unternehmungen according to its report for 1911-1912 
were as follows: * 

* The table is an adaptation from R. Liefmann's Beteiligungs- und 
FinanzierungsgeseUschaften, pp. 466-467. 



372 COMBINATION ORGANIZATIONS 

Group I — Electric Light & Power Companies 



1. Officine Elettriche Genovesi, Genoa, 

Italy 

2. Compafiia Sevillana de Electricidad, 

Seville, Spain 

3. Compafiia Barcelonesa de Elec- 

tricidad, Barcelona, Spain 

4. A.-Ges. Elektrizitatswerk Strass- 

burg, Strasbourg, France 

5. Kraftiibertragungswerke Rheinfel- 

den A.-Ges., Germany 

6. Deutsch-tjberseeische Elektrizitats 

Ges., Berlin, Germany 

7. Schlesische Elektrizitats u. Gas 

A.-Ges. Silesia, Germany 

8. Markisches Elektrizitatswerk A.- 

Ges. Berlin, Germany 

9. Ges. fur Elektrische Beleuchtung, 

St. Petersburg, Russia 

10. Elektrizitatswerk Abo (Finland) 

A.-Ges., Berlin, Germany 

11. Elektrizitatswerk Rathausen A.- 

Ges., Lucerne, Switzerland 

12. Kraft werke , Laufenberg A.-Ges., 

Switzerland 

13. Societa Meridionale di Electtricita, 

Naples, Italy 

14. Societa Idroelettricia Ligure, Milan, 

Italy .^ 

15. Compagnie Centrale d'Energie elec- 

trique, Paris, France 

16. Oberrheinische Kraftwerke A.-Ges., 
Mulhausen, France 

17. Elektrizitatswerk u. Strassenbahn, 

Konigsberg, Germany 



Stock 
outstanding 



17,000,000 Lire 

10,000,000 Pesetas 
18,000,000 " 
11,750,000 Marks 
12,000,000 " 
120,000,000 " 
11,000,000 " 

8,000,000 " 
40,000,000 Rubles 

2,000,000 Marks 

4,100,000 Francs 
15,500,000 '•' 
10,000,000 Lire 

6,000,000 " 
15,000,000 Francs 
20,000,000 Marks 

2,000,000 " 



Amount held 
by the bank 



4,000,000 
4,698,000 
4,440,000 
2,190,000 
3,300,000 
5,000,000 

629,000 
4,000,000 
3,000,000 
1,000,000 

490,000 

810,000 
2,000,000 
2,000,000 

812,500 
4,400,000 

667,000 



FINANCE AND ASSUMPTION COMPANIES 373 



Group II — Transportation Companies 

18. Unione Italiana Tramways Elet-I 

trici, Genoa, Italy ! 18,000,000 Lire 

19. Solinger Kleinbahn A.-Ges., Sol- 

ingen, Germany 2,500,000 Marks 

20. Ges. fiir elektrische Hoch u. Unter- 

grundabhnen, Berlin 50,000,000 " 

21. Schlesische Kleinbahn A.-Ges., 

Kattowitz, Germany 10,000,000 " 



4,000,000 
2,500,000 
2,200,000 
2,400,000 



Group III — Electro-Chemical Companies 



22. Elektrocbemische Werke G.m.b. H., 

Bitterfeld, Germany 

23. Brandenburgische Carbid-u. Elek- 

trizitats Werke, Germany 

24. "Nitrum" A.-Ges., Bodio, Switzer- 

land 



5,500,000 Marks 
3,500,000 " 
1,000,000 Francs 



5,500,000 
366,000 
250,000 



Group IV — Manufacturing Companies 



25. A.-Ges. Brown Boveri & Company, 

Baden, Germany 

26. Felton u. Guilleaume Karlswerk 

A,-Ges., Alsace, France 



28,000,000 Francs 
55,000,000 Marks 



500,000 
3,500,000 



Group V — Finance Companies 

30,000,000 Francs 



27. A.-Ges. "Motor," Baden, Germany 

28. Watt A.-Ges. fiir elektrische tJnter- 

nehmungen, Switzerland 

29. Dinamo, Societa Italiana per Im- 

prese Elettriche, Milan, Italy .... 

30. Societe Centrale pour ITndustrie 

electrique, Paris, France 

31. Societa per lo Sviluppo delle Imprese 

Elettriche in Italia 

32. Elektrizitats-A.-Ges. vorm. W. Lah- 

meyer & Company, Germany. . . . 



10,000,000 " 
5,000,000 Lire 
20,000,000 Francs 
10,000,000 Lire 
25,000,000 Marks 



500,000 
3,500,000 

250,000 
2,000,000 
4,500,000 
21,700,000 



The Bank and its controlled subsidiaries are reported to 
have had important stock interests in no less than 80 under- 
takings in the electrical industry which enabled it to pay 
a 10 per cent dividend. This company, however, is only 



374 COMBINATION ORGANIZATIONS 

one of many finance and assumption companies connected 
with the Allgemeine Elektrizitatsgesellschaft. 

The finance company seldom stands alone. It is gen- 
erally more or less closely connected with one or more 
assumption companies whose purpose it is to afford it an 
outlet for the securities acquired through finance opera- 
tions. So we find the Schaffhausensche Bankverein, a 
finance institution employing the Internationale Bahn- 
gesellschaft as an assumption and control company to re- 
lieve it of its securities in potash mining and refining 
companies. Similar companies are to be found in the 
group of concerns engaged in the construction and opera- 
tion of local and street railways, the electrical, chemical 
and petroleum industries. 

This inter-relation of companies is well illustrated by 
the Lenz Group. At the head stands Lenz & Company, 
G. m. b. H.,^ a concern engaged in the manufacture of rail- 
way equipment and the construction and operation of local 
railways. This company, with the assistance of two banks, 
successively organized six finance and assumption com- 
panies, as illustrated in the diagram on opposite page. 

A similar group built up by the Dresdener Bank, also 
for railway construction and operation, is depicted by 
Professor Liefmann as follows: 

Dresdener Bank and 

Bass & Herz Bank 

Gesellschaft fiir Industrielle Investment and later a general 

Unternehmungen finance company 

Aktiengesellschaft fiir Bahnbaii Finance company specializing in 

n. Betrieb railway construction 

Deutsche Eisenbahngesellschaft 1st assumption company 

Indu^striebahn-Aktiengesellschaft 2nd assumption company 

Local railways in Hoxter, etc. Operating companies 

5 G. m. b. H. is an abbreviation of Gesellschaft mit beschrankter 
Haftung (a company with limited liability). It corresponds in 
general to our corporation. 



FINANCE AND ASSUMPTION COMPANIES 375 

The two great German electric companies, namely, the 
Allgemeine Elektrizitatsgesellschaft and the Siemens- 
Schuckert concern have made lavish use of these two types 
of companies. In 1915, the former had no less than 35 
participation and selling subsidiaries of which the Bank 



ASSUMPTION AND FINIANCE COMPANIES OF THE LENZ GROUP OF GERMANY 
ENGAGED IN RAILROAD CONSTRUCTION AND OPERATION 



/fai/roofd equipment monu 
■faeturing an<^ consfrucf 
ion compani/. 



Assumftfien 



Assumption, mining _^ 
"^ deuelopmentccmparHf. 




/ndefiendent f /nonce 
company 

\ 



Independent 
finance compantf. 



Asscj/npfion and finance 
Company- /ater a/so engaged 
in construction and Operat/on. 



Assumption and finance 
compancj. 



^ [Assumption eo/npont/jolse 
\ constructs and operates. 



Koionialeber^bat 
6.m.b. H. 



ueutschel\olonialeisenbahnbau / 

- und Betriebsjesellschaf t A Operatins, assumption and 

4.M111. n. STOCK {'ni/estment cornpany. 



"k Lem & Company's interest in the first three companies u/as transferred to the 
AHtiengesel/sc/)aftfiirl/er/sef}rsu/esen on the formofion of the/(rtterin/90/. 

Data from /?. Llefmann 's Betei/isonss- 
una Finonzierungs^ese/ischoffen. 



AH.sroctfDm 



fiir Elektrische Unternehmungen, previously described, is 
but one, while the latter had 25 of which 12 were purely 
assumption or finance companies. The. enormous extent 
of substitution of securities brought about through the 
Allgemeine Elektrizitatsgesellschaft is commented upon by 
Professor Liefmann as follow^s: "Of the total mass of 



376 COMBINATION ORGANIZATIONS 

securities issued by the A. E. G., which, though difficult to 
estimate accurately, can hardly amount to less than one 
billion marks, perhaps -one half, or surely between 500 and 
600 million marks, consists of securities, that in turn are 
supported by others. These are the securities of the par- 
ticipation companies and of all of the (subsidiary) manu- 
facturing companies which, like the A. E. G. itself, are to 
a large extent also participation companies." ^ 

The European Petroleum Union was similarly supplied. 
Among its finance companies were the Ungarische Bank 
fiir Industrie und Handel, the Internationale Petroleum- 
gesellschaft, the Roumanian Trust and the Societe beige 
de petrole, while the Vienna Banking Association and the 
Deutsche Bank also aided in financing the combine. The 
Deutsche Bank had as its chief petroleum securities 
assumption company the Deutsche Petroleum-Aktien- 
gesellschaft through which it participated in most of the 
larger European producing and distributing companies 
belonging to the Union, 

Finance and Assumption Companies in Other Countries. 
— While finance and assumption companies are to be found 
in nearly all countries where the principle of substitution 
of securities has received the sanction of law, they are 
nowhere else as characteristic of the industrial organization 
as in Germany and Belgium. Nevertheless, in England, 
Switzerland, France and other European countries there 
are many excellent examples. 

Among the English finance companies the two great min- 
ing groups of South Africa and several of their subsidiaries 
and affiliated companies deserve consideration. 

The first of these is the famous Cecil Rhodes Group, 
which, in 1915, included as its chief finance and investment 
companies the following: 

6 Ibid. p. 479 (Translation by the author). 



FINANCE AND ASSUMPTION COMPANIES 377 

(1) Consolidated Goldfields of South Africa, Ltd., formed in 
1892 by fusion of the Goldfields of South Africa, Ltd., and 
the African Gold Share Investment Company, Ltd., as 
head of the group. 

(2) South African Gold Trust, formed in 1894 by the C. G. of 
S. AJ as an assumption and investment company. 

(3) Gold Finance Company, formed in 1898 by the C. G. of 
S. A. as an assumption and investment company, but 
since liquidated. 

(4) Rhodesia Exploration and Development Company, Ltd., 
formed by the C. G. of S. A. in 1895 as a finance and 
investment company which in 1910 absorbed the London & 
Johannesburg Trust Company, the Rhodesia Banket Com- 
pany, the Etna Development Company, the Rhodesian 
Abercorn Shamva Trust Company, and the Gold Schists 
of Rhodesia. 

(5) Gold Mines Investment Company, Ltd., acquired in 1905 
by the C. G. of S. A. as a finance and investment company. 

(6) Goldfields Rhodesia Development Company, Ltd., formed 
in 1911 by the C. G. of S. A. as an assumption company 
to take over a large portion of its South African holdings 
including the Rhodesian Exploration & Development 
Company. 

(7) Goldfields-American Development Company, formed in 
1911 by the C. G. of S. A. to take over its American 
interests. 

Through these subsidiary and controlled companies, the 
Consolidated Goldfields of South Africa participates in 
the earning and losses of perhaps more than one hundred 
other companies including among numerous mining and 
development undertakings also some finance, investment 
and assumption companies. 

A similar group of finance and assumption companies — 

also in the mining industry — is that organized by Barnato, 

Joel and their associates. At the head of this group stands 

7 C. G. of S. A. is the ConsoHdated Goldfields of South Africa, 
Limited. 



378 COMBINATION ORGANIZATIONS 

the Johannesburg Consolidated Investment Company, Ltd., 
formed in 1889 as an assumption and finance company. 
Among its controlled companies are the famous De Beers 
Consolidated Mines and numerous other South African 
enterprises. It also has extensive holdings in many of the 
companies in which the Consolidated Goldfields of South 
Africa also is interested. 

A few English finance companies also have been formed 
to aid in the promotion and development of East India 
rubber plantations and for colonial development. 

In Switzerland we find the Bank fiir Orientalische Eisen- 
bahnen, organized in Zurich by an international bank 
consortium; the Union Ottomane, Societe pour enterprises 
electriques en Orient, emanating from the Deutsche Bank; 
the Schweitzerische Eisenbahnbank ; the Union finangiere 
de Geneve; the Societe finangiere pour enterprises elec- 
triques aux Etats Unis and numerous others. 

In Belgium there are a large number of such companies 
interested in promoting and financing local and street rail- 
ways, electric light and power works, and a few that do not 
specialize in undertakings confined to a single industry. 
Among the latter the most important one is the Societe 
generale de - Belgique, which was first organized in 1822 
as an investment company under the name Societe generale 
des Pays-Bas. In 1830, this was changed to Societe 
generale pour favoriser I'industrie nationale. It adopted 
its present name in 1903. 

Evaluation of Finance and Assumption Companies. — 
We have seen that the modern large business unit, requir- 
ing as it does enormous sums of ready money capital that 
must be available to it at a stated time, must be financed. 
The investable funds of a country are usually in the hands 
of banks and trust companies whose business it is to deal 
in money capital ; consequently the institution which under- 
takes to finance big business enterprises must bridge the 



FINANCE AND ASSUMPTION COMPANIES 379 

gaps between the underlying economic capital of industry 
and the money capital. 

We have also seen that this financing may be undertaken 
by industrial corporations themselves, by underwriting 
syndicates representing banking institutions or by 
securities-issuing finance companies; and that, while the 
performance of the function, when undertaken by the 
syndicate, need not go beyond primary securitization of 
basic capital, it, nevertheless, frequently involves the 
substitution of securities resulting from the performance 
of the function by securities-issuing organizations. 

These circumstances give birth to peculiar institutions 
and new problems. While the underwriting syndicate is 
but a temporary voluntary association possessing a highly 
elastic capital, the finance company is a permanent organ- 
ization with a fixed capitalization that can not be changed 
except as prescribed by law. Once having undertaken a 
finance transaction converting its funds into securities, 
the syndicate tries to sell these to investors at a prolit. 
If it fails it simply apportions to each member his propor- 
tionate share and dissolves. Then a new syndicate is 
formed to undertake the next venture. Here, the finance 
company is at a disadvantage. It is obliged to keep a 
steady stream of securities flowing through it in order to 
enable it to continue operations. It may, of course, sell 
the acquired securities to investors or keep them, issuing 
bonds to secure new capital. If it is an independent con- 
cern, it obviously has a considerable freedom of choice; 
but the fact remains that most finance companies are the 
key-links of the chain that binds the industrial enterprise 
to its source of funds. Their purpose, therefore, is two- 
fold, namely: on the one hand, to furnish capital and, on 
the other, to serve as the web of the fabric that unifies an 
industry. This circumstance limits their freedom of 
action, and they are forced to devise some means, consistent 



380 COMBINATION ORGANIZATIONS 

with their two-fold purpose, that vv^ll enable them to throw 
off a surplus of acquired securities in order to finance new 
undertakings. The institution that has so cleverly been 
devised to perform this new function is the assumption 
company. 

Without the use of the assumption company the finance 
company would eventually become nothing more than a 
control or an investment company, depending upon the 
per cent of securities of financed concerns that it possesses; 
and sooner or later it must step in to supervise the opera- 
tion of controlled companies to serve its own interests. 
In other words, it would soon lose the character of a finance 
company. But, by successively organizing new assump- 
tion companies, either by itself or in conjunction with the 
banks and industrials that it serves, it is in a position to 
perpetuate its existence as a finance company indefinitely. 

However, the risk of loss entailed in financing new enter- 
prises is a great one. The profits from one venture may 
be wiped out completely by the losses from another. Con- 
sequently, the capital assets of the finance companies, 
because of the constant change of securities, are subject to 
extreme fluctuations. It is unlike that of an industrial 
corporation, or of an investment or control company whose 
assets tend to remain more fixed in character. Today, the 
finance company's assets may consist largely of the securi- 
ties of corporation A, which it has just financed, and a few^ 
months hence, they are chiefly composed of the securities 
of company B. The stockholders of such a! company 
never know of just what securities the capital consists and 
have no means of ascertaining the financial standing of 
their company, unless it were to render reports at very fre- 
quent intervals. Furthermore, the value ascribed to securi- 
ties purchased by finance companies in exchange for invest- 
ment funds is itself a speculation. The price per unit in 
such cases is not established by the free play of the forces 



FINANCE AND ASSUMPTION COMPANIES 381 

of demand and supply characteristic of exchange quota- 
tions, but is an arbitrary price, based upon the results of 
a survey of the prospects of success or failure of the 
financed enterprise. 

Under circumstances such as these, the independent 
finance company can be made to appeal to investors only 
where there is either a chance for enormous profit, as in 
mining and tropical exploration enterprises whose specu- 
lative character is generally recognized, or in countries 
where the conmiercial laws are such as to afford the highest 
degree of protection to investors through provisions that 
require full publicity as to the character of the securities 
possessed by the companies and of the assets that underlie 
them. In no country are the laws on these points suf- 
ficiently firm and exacting, though those of Germany and 
Belgium most nearly approach the desired end. The in- 
dependent finance company is, therefore, largely a specu- 
lative enterprise, that, through a judicious use of the 
assumption company, can often diminish the risk some- 
what by foisting its less desirable securities off on 
the latter. 

The subsidiary finance company, including such as have 
been formed jointly by banking institutions and industrials 
to build up an industry on sound business principles, stands 
in a better position. It is merely a convenient and admir- 
ably adapted tool to facilitate industrial development. 
It confines its activities to the industry that it serves acting 
both as a financial agent and as a sort of mortar to hold 
the individual bricks of the industrial house together, 
while the several assumption companies that may emanate 
from it strengthen rather than weaken its position. But, 
at the same time, if the general public is to be induced to 
invest in such enterprises, it must be afforded much greater 
protection by law than it now has. This is especially true 
of the United States, where the present system of corpora- 



382 COMBINATION ORGANIZATIONS 

tion laws is quite inadequate. Until such time as our laws 
are strengthened with a view to protecting investors, the 
use of finance companies in this country must continue to 
be restricted to the few industries that do their own 
financing and where they will remain very largely as owned 
or controlled companies whose securities, other than bonds^ 
will not ordinarily find their way to the general public. 



CHAPTER XIX 

THE GROWTH AND DEVELOPMENT OF A MONOPOLISTIC 

CONTROL COMPANY — THE AMERICAN TOBACCO 

COMPANY 

A STUDY of the growth and development of one of the 
great monopolistic control companies that are such charac- 
teristic features of the American system of business owner- 
ship will serve to illustrate the great variety of methods 
that have been employed in building up combinations of 
this type. The history of the Standard Oil Company, of 
the United States Steel Corporation, of the American To- 
bacco Company and others are available for this purpose, 
but the limits of this work are such as to preclude a 
description of more than one of them. The brief sketch 
of the growth of the American Tobacco Company, given 
in the decision of the Supreme Court of the United States, 
declaring this company to be a combination in violation 
of the Sherman Anti-Trust Act, is so admirably suited to 
this purpose that it is here reprinted in full.^ The court 
recounted the undisputed facts as follows: 

'' The matters to be considered under this heading we 
think can best be made clear by stating the merest out- 
line of the condition of the tobacco industry prior to what 
is asserted to have been the initial movement in the com- 
bination which the suit assails and in the light so afforded 
to briefly recite the history of the assailed acts and con- 
tracts. We shall divide the subject into two periods, 
(a) the one from the time of the organization of the first 

1 United States of America v. American Tobacco Company, 221 
U. S., 106, pp. 155-183. 

383 



384 COMBINATION ORGANIZATIONS 

or old American Tobacco Company in 1890 to the organi- 
zation of the Continental Tobacco Company, and 
(6) from the date of such organization to the filing of the 
bill in this case. 

" Summarizing in the broadest way the conditions which 
The tobacco obtained prior to 1890, as to the production, 
industry manufacture and distribution of tobacco, the 

?^^?L« following general facts are adequate to 

to 1890. . XI -4. .• 

portray the situation. 

" Tobacco was grown in many sections of the country 
having diversity of soil and climate and therefore was 
subject to various vicissitudes resulting from the places of 
production and consequently varied in quality. The great 
diversity of use to which tobacco was applied in manufac- 
turing caused it to be that there was a demand for all the 
various qualities. The demand for all qualities was not 
local, but widespread, extending as well to domestic as to 
foreign trade, and therefore, all the products were marketed 
under competitive conditions of a peculiarly advantageous 
nature. The manufacture of the product in this country 
in various forms was successfully carried on by many in- 
dividuals or concerns scattered throughout the country, 
a larger number perhaps of the manufacturers being in the 
vicinage of production and others being advantageously 
situated in or near the principal markets of distribution. 

'' Before January, 1890, five distinct concerns — Allen & 
Ginter, with factory at Richmond, Va.; W. Duke, Sons & 
Co., with factories at Durham, North Carolina, and New 
York City; Kinney Tobacco Company, with factory at 
New York City; W. S. Kimball & Company, with factory 
at Rochester, New York ; Goodwin & Company, with fac- 
tory at Brooklyn, New York — manufactured, distributed 
and sold in the United States and abroad 95 per cent of all 
the domestic cigarette and less than 8 per cent of the 
smoking tobacco produced in the United States. There is 
no doubt that these factories were competitors in the pur- 
chase of the raw product which they manufactured and in 
the distribution and sale of the manufactured products. 
Indeed it is shown that prior to 1890 not only had normal 



A MONOPOLISTIC CONTROL COMPANY 385 

and ordinary competition existed between the factories in 
question, but that the competition had been fierce and 
abnormaL In January, 1890, having agreed upon a capital 
stock of $25,000,000, all to be divided amongst them, and 
Amalgama- who should be directors, the concerns referred 
tion of five to organized the American Tobacco Company 
manuf^actur- ^^ ^^^ Jersey, 'for trading and manufactur- 
ing concerns ing,' with broad powers, and conveyed to it 
into the ^he assets and businesses, including good will 

Tobacco Co. and right to use the names of the old con- 
(1890). cerns; and thereafter this corporation carried 

on the business of all. The $25,000,000 of stock of the 
Tobacco Company was allotted to the charter members as 
follows: Allen & Ginter, $3,000,000 preferred, $4,500,000 
common; W. Duke, Sons & Co., $3,000,000 preferred, $4,- 
500,000 common; Kinney Tobacco Company, $2,000,000 
preferred, $3,000,000 common; W. S. Kimball & Co., 
$1,000,000 preferred, $1,500,000 common; and Goodwin & 
Co., $1,000,000 preferred, $1,500,000 common. 

" There is a charge that the valuation at which the re- 
spective properties were capitalized in the new corporation 
was enormously in excess of their actual value. We, how- 
ever, put that subject aside, since we propose only to deal 
with facts which are not in controversy. 

" Shortly after the formation of the new corporation the 
Goodwin & Co. factory was closed and the directors ordered 
' that the manufacture of all tobacco cigarettes be concen- 
trated at Richmond.' The new corporation in 1890, the 
first year of its operation, manufactured about two and 
one-half billion cigarettes, that is, about 96 or 97 per cent 
of the total domestic output, and about five and one-half 
million pounds of smoking tobacco out of a total domestic 
product of nearly seventy million pounds. 

" In a little over a year after the organization of the 
company it increased its capital stock by ten million 
dollars. The purpose of this increase is inferable from the 
considerations which we now state. 

" There was a firm known as Pfingst, Doerhoefer & Co., 
consisting of a number of partners, who had been long and 



386 COMBINATION ORGANIZATIONS 

successfully carrying on the business of manufacturing 
Enters the P^^§ tobacco in Louisville, Kentucky, and dis- 
plug tobacco tributing it through the channels of interstate 
business. commerce. In January, 1891, this firm was 

^*'^^* * converted into a corporation known as the 

National Tobacco Works, having a capital stock of 
$400,000 all of which was issued to the partners. Almost 
immediately thereafter, in the month of February, the 
American Tobacco Company became the purchaser of all 
the capital stock of the new corporation, paying $600,000 
cash and $1,200,000 in stock of the American Tobacco 
Company. The members of the previously existing firm 
bound themselves by contract with the American Tobacco 
Company to enter its service and manage the business 
and property sold, and each further agreed that for ten 
years he would not engage in carrying on, directly or in- 
directly, or permit or suffer the use of his name in connec- 
tion with the carrying on of the tobacco business in any 
form. 

" In April following, the American Tobacco Company 
bought out the business of Philip Whitlock, of Richmond, 
Enters cigar Virginia, who was engaged in the manufacture 
and cheroot of cheroots and cigars, and with the exclusive 
(A^pri?^* right to use the name of Whitlock. The con- 
1891). sideration for this purchase was $300,000, and 

W^hitlock agree to become an employee of the American 
Tobacco Company for a number of years and not to en- 
gage for twenty years in the tobacco business. 

'^ In the month of April the American Tobacco Company 
also acquired the business of Marburg Brothers, a well 
Enters known firm located at Baltimore, Maryland, 

smoking and engaged in the manufacture and distribu- 

tobacco and ^jqj^ ^f tobacco, principally smoking and snuff, 
business. The consideration was a cash payment of 
(April, * $164,627.65 and stock to the amount of $3,075,- 
1891). QQQ rpj^g members of the firm also conveyed 

the right to the use of the firm's name and agreed not to en- 
gage in the tobacco business for a lengthy period. 

" Again, in the same month, the American Tobacco 



A MONOPOLISTIC CONTROL COMPANY 387 

Company bought out a tobacco firm of old standing, also 
located in Baltimore, known as G. W. Gail & Ax, engaged 
principally in manufacturing and selling smoking tobacco, 
buying with the business the exclusive right to use the 
name of the firm or the partners, and the members of the 
firm agreed not to engage in the tobacco business for a 
specified period. The consideration for this purchase was 
$77,582.66 in cash and stock to the amount of $1,760,000. 
The plant was abandoned soon after. 

" The result of these purchases was manifested at once 
in the product of the company for the year 1891, as will 
appear from the note in the margin-^ It will be seen that 

Number Pounds 

Cigarettes 2,788,788,000 

Cheroots and little cigars 40,009,000 

Smoking 13,813,354 

Fine cut 560,633 

Snuff 383,162 

Plug 4,442,774 

Total output for the United States, 1891 

Cigarettes 3,137,318,596 

Smoking 13,813,355 

Fine cut 16,968,870 

Plug and twist 166,177,951 

Snuff 10,674,241 

as to cheroots, smoking tobacco, fine cut tobacco, snuff and 
plug tobacco, the company had become a factor in all 
branches of the tobacco industry. 

" Referring to the occurrences of the year 1891, as in all 
respects typical of the occurrences which took place in all 
the other years of the first period, that is during the years 
1892, 1893, 1894, 1895, 1896, 1897, and 1898, we content 
ourselves with saying that it is undisputed that between 
February, 1891, and October, 1898, including the purchases 
which we have specifically referred to, the American To- 
bacco Company acquired fifteen going tobacco concerns 
doing business in the States of Kentucky, Louisiana, Mary- 
land, Michigan, Missouri, New York, North Carolina, and 

2 The output of the American Tobacco Company for 1891: 



388 COMBINATION ORGANIZATIONS 

Virginia. For ten of the plants an all cash consideration of 
$6,410,235.26 was paid; while the payments for the remain- 
ing five aggregated in cash $1,115,100.95 and in stock $4,- 
123,000. It is worth noting that the last purchase, in 
October 1898, was of the Drummond Tobacco Company, a 
Missouri corporation dealing principally in plug, for which 
a cash consideration was paid of $3,457,500. 

'^ The corporations which were combined for the purpose 
of forming the American Tobacco Company produced a 
very small portion of plug tobacco. That an increase in 
this direction was contemplated is manifested by the al- 
most immediate increase of the stock and its use for the 
purpose of acquiring, as we have indicated, in 1891 and 
1892, the ownership and control of concerns manufacturing 
plug tobacco and the consequent increase in that branch of 
production. There is no dispute that as early as 1893 the 
president of the American Tobacco Company, by authority 
of the corporation, approached- leading manufacturers of 
plug tobacco and sought to bring about a combination of 
the plug tobacco interests, and upon the failure 
tobacco war " ^o accomplish this, ruinous competition, by 
and the lowering the price below its cost, ensued. As 

^f^JJ^*^^^ a result of this warfare, which continued until 
Continental 1898, the American Tobacco Company sus- 
Tobacco Co. tained severe losses aggregating more than four 
(1898). millions of dollars. The warfare produced its 

natural result, not only because the company acquired 
during the last two years of the campaign, as we have 
stated, control of important plug tobacco concerns, but 
others engaged in that industry came to terms. We say 
this because in 1898, in connection with several leading 
plug manufacturers, the American Tobacco Company or- 
ganized a New Jersey corporation styled the Continental 
Tobacco Company, for " trading and manufacturing," with 
a capital of $75,000,000, afterwards increased to $100,- 
000,000. The new company issued its stock and took trans- 
fers to the plants, assets and businesses of five large and 
successful competing plug manufacturers.^ 

3 P. J. Sorg Co., having factory at Middletown, Ohio, who re- 



A MONOPOLISTIC CONTROL COMPANY 389 

" The American Tobacco Company also conveyed to this 
corporation, at large valuations, the assets, brands, real 
Transfer of estate and good will pertaining to its plug 
plug business tobacco business, including the National 
Continental Tobacco Works, the James G. Butler Tobacco 
Tobacco Co. Co., Drummond Tobacco Company, and 
Brown Tobacco Co., receiving as consideration $30,274,200 
of stock (one-half common and one-half preferred), 
$300,000 cash, and an additional sum for losses sustained 
in the plug business during 1898, $840,035. Mr. Duke, 
the president of the American Tobacco Company, also 
became president of the Continental Company. 

" Under the preliminary agreement which was made 
looking to the formation of the Continental Tobacco Com- 
pany, that company acquired from the holders 
Continental ^11 the $3,000,000 of the common stock of the 
Tobacco Co. P. Lorillard Company in exchange for $6,000,- 
Sror ^^^ °^ ^^® ^^°^^' ^^^ $1,581,300 of the $2,000,- 

over the 000 preferred in exchange for notes aggregating 

P. Lorillard a sum considerably larger. The Lorillard 
Company, however, although it thus passed 
practically under the control of the American Tobacco 
Company by virtue of its ow^nership of stock in the Con- 
tinental Company, was not liquidated, but its business 
continued to be conducted as a distinct corporation, its 
goods being marked and put upon the market just as if 
they were the manufacture of an independent concern. 



ceived preferred stock $4,350,000, common stock $4,525,000, and 
cash $224,375. 

John Finzer and Brothers, having factory at Louisville, Ky., 
who received preferred stock $2,250,000, common stock $3,050,000, 
and cash $550,000. 

Daniel Scotten & Co., having factory at Detroit, Mich., who 
received preferred stock $1,911,100, and common stock $3,012,500. 

P. H. Mayo & Bros., having factory at Richmond, Va., who re- 
ceived preferred stock $1,250,000, common stock $1,925,000, and 
cash $66,125. 

John Wright Co., having factorj' at Richmond, Va., who re- 
ceived preferred stock $495,000, common stock $495,000, and cash 
$4,116.67. 



390 COMBINATION ORGANIZATIONS 

'' Following the organization of the Continental Tobacco 
Company the American Tobacco Company increased its 
rpjjg capital stock from thirty-five millions of dol- 

American lars to seventy millions of dollars, and de- 
Tobacco Co., clared a stock dividend of one hundred per 
capitaliza- cent on its common stock, that is, a stock divi- 
tion. dend of $21,000,000. 

" As the facts just stated bring us to the end of the 
first period which at the outset we stated it was our purpose 
to review, it is well briefly to point out the increase in the 
power and control of the American Tobacco Company and 
the extension of its activities to all forms of tobacco pro- 
ducts which had been accomplished just prior to the or- 
ganization of the Continental Tobacco Company. Noth- 
Power and ing could show it more clearly than the follow- 
control of jng: At the end of the time the company was 
can Tobacco manufacturing 86 per cent or thereabouts of 
Co. in 1898. all the cigarettes produced in the United States, 
above 26 per cent of all the smoking tobacco, more than 
22 per cent of all plug tobacco, 51 per cent of all little 
cigars, 6 per cent each of all snuff and fine cut tobacco, and 
over 2 per cent of all cigars and cheroots. 

" A brief reference to the occurrences of the second 
period; that' is, from and after the organization of the 
-,, , Continental Tobacco Company up to the time 

period of of the bringing of this suit, will serve to make 
expansion evident that the transactions in their essence 
begins, 1899. j^^^ ^|j ^^^ characteristics of the occurrences 
of the first period. 

" In the year 1899 and thereafter either the American or 
the Continental company, for cash or stock, at an aggregate 
cost of fifty millions of dollars ($50,000,000) , bought and 
closed up some thirty competing corporations and partner- 
ships theretofore engaged in interstate and 
competing foreign commerce as manufacturers, sellers and 
concerns are distributors of tobacco and related commodi- 
acqmred. ^j^g^ ^j^^ interested parties covenanting not to 
engage in the business. Likewise the two corporations 
acquired for cash, by issuing stock, and otherwise, con- 



A MONOPOLISTIC CONTROL COMPANY 391 

trol of many competing corporations now going concerns, 
with plants in various States, Cuba and Porto Rico, which 
manufactured, bought, sold and distributed tobacco prod- 
ucts or related articles throughout the United States and 
foreign countries, and took from the parties in interest 
covenants not to engage in the tobacco business. 

" The plants thus acquired were operated until the mer- 
ger in 1904, to which we shall hereafter refer, as a part of 
the general system of the American and Continental com- 
panies. The power resulting from and the purpose contem- 
plated in making these acquisitions by the companies just 
referred to, however, may not be measured by considering 
alone the business of the company directly acquired since 
some of these companies were made the vehicles, as repre- 
senting the American or Continental company, for acquir- 
ing and holding the stock of other and competing companies 
thus amplifying the power resulting from the acquisitions 
directly made by the American or Continental company, 
without ostensibly doing so. It is besides undisputed that 
in many instances the acquired corporations with the sub- 
sidiary companies over which they had control through 
stock ownership were carried on ostensibly as independent 
concerns disconnected from either the American or the 
Continental company, although they were controlled and 
owned by one or the other of these companies.- Without 
going into details on these subjects, for the sake of brevity, 
we append in the margin a statement of the corporations 
thus acquired with the mention of the competing concerns 
which such corporations acquired.* 

" It is of the utmost importance to observe that the ac- 
quisitions made by the subsidiary corporations in some 
cases likewise show the remarkable facts stated above, that 
is, the disbursement of enormous amounts of money to 
acquire plants, which on being purchased were not utilized 
but were immediately closed. It is also to be remarked, 
that the facts stated in the memorandum in the margin 
show on their face a singular identity between the con- 
ceptions which governed the transactions of this latter 
* Note omitted. 



392 COMBINATION ORGANIZATIONS 

period with those which evidently existed at the very birth 
of the original organization of the American Tobacco Com- 
pany, as exemplified by the transactions in the first period. 
A statement of particular transactions outside of those 
previously referred to as having occurred during the period 
New in question will serve additionally to make 

controlled the situation clear. And to accomplish this 
companies purpose we shall, as briefly as may be consis- 
organized. tent with clarity, separately refer to the facts 
concerning the organization during the second period of 
the five corporations which were named as defendants in 
the bill, as heretofore stated and which for the purpose 
of designation we have hitherto classified as accessory de- 
fendants, such corporations being the American Snuff Com- 
pany, American Cigar Company, American Stogie Com- 
pany, MacAndrews & Forbes Company (licorice), and 
Conley Foil Company. 

^' (!)• The American Snuff Company 

As we have seen, the American Tobacco Company at 
the commencement of the first period produced a very 
small quantity of snuff. Its capacity, however, in that 
regard was augmented owing particularly to the forma- 
tion of the Continental Tobacco Company and the ac- 
quisition of the Lorillard Company, by which it came to 
be a serious factor as a snuff producer. There shortly 
ensued an aggressive competition in the snuff business be- 
tween the American Tobacco Company, with the force 
acquired from the vantage ground resulting from the 
dominancy of its expanded organization, and others in 
the trade operating independently of that organization. 
The result was identical with that which had previously 
arisen from like conditions in the past. 
The snuff " In March, 1900, there was organized in 

business is New Jersey a corporation known as the Ameri- 
to^the^Am. can Snuff Company, with a capital of $25,000,- 
Snuff Co. 000, one-half preferred and one-half common, 
which took over the snuff business of the P. Lorillard Com- 



A MONOPOLISTIC CONTROL COMPANY 893 

pany, Continental Tobacco Company and the American 
Tobacco Company, with that of a large competitor, viz: 
The Atlantic Snuff Co. The stock of the new company was 
thus apportioned: Atlantic Snuff Company, preferred, 
$7,500,000, common, $25,000,000;^ P. Lorillard Company, 
preferred, $1,124,700, common, $3,459,400; The American 
Tobacco Company, preferred, $1,177,800, common, $3,227,- 
500; Continental Tobacco Company, preferred, $197,500 
common, $813,100. The stock issued to the Continental 
Tobacco Company and the defendants, P. Lorillard Com- 
pany and the American Tobacco Company, is still held 
by the latter, and they have at all times had a controlling 
interest in the Snuff Company. All the companies, to- 
gether with their officers and directors, covenanted that 
they would not thereafter engage as competitors in the 
tobacco business or the manufacture, sale, or distribution 
of snuff. 

" Among the assets transferred by the Atlantic Snuff 
Company to American Snuff Company were all the shares 
($600,000) of W. E. Garrett & Sons, Inc., then and now 
one of the oldest and very largest producers of snuff, for 
a long time and still engaged at Yorkland, Del., in inter- 
state and foreign commerce in tobacco and its products, 
and which controlled through stock ownership the South- 
ern Snuff Company, Memphis, Tenn., Dental Snuff Com- 
pany, Lynchburg, Va., and Stewart-Ralph Snuff Company, 
Clarkeville, Tenn. The separate existence of W. E. Garrett 
& Son, Inc., has been preserved and its business conducted 
under the corporate name. In March, 1900, the American 
Snuff Company acquired all the shares of George W. Helme 
Company, one of the oldest and largest producers of snuff 
and actively engaged at Helmetta, N. J., in interstate and 
foreign commerce in competition with defendants, by issu- 
ing in exchange therefor $2,000,000 preferred stock and 
$1,000,000 conomon; and it thereafter took a conveyance of 
all assets of the acquired company and now operates the 
plant under its own name, 

" As a result of the transactions just stated it came to 
5 Thus in original. Probably $2,500,000, 



394 COMBINATION ORGANIZATIONS 

pass that the American Tobacco Company, which had at 
the end of the first period only a very small percentage of 
the snuff manufacturing business, came virtually to have 
the dominant control as a manufacturer of that product. 

" 2. Conley Foil Company — manufacturers of tin- 
foil, an essential for packing tobacco products: 
In December, 1899, the American Tobacco Company 
secured control of the business of John Conley & Sons, 
a partnership of New York City. By agree- 
tinfoil ment the Conley Foil Company was incor- 

business. porated in New York " for trading and manu- 
(^^^^)' facturing," etc., with $250,000 capital, 

ultimately increased to $825,000. The corporation took 
over the business and assets of the firm, and the American 
Tobacco Company became owner of a majority of the 
shares of stock. The Conley Foil Company has acquired 
all the shares of stock of the Johnson Tinfoil & Metal Com- 
pany, of St. Louis, a leading competitor, and they supply 
under fixed contracts at remunerative prices the tinfoil 
used by the defendants, which constitutes the major part 
of the total production in the United States. 

^' 3. American Cigar Company: 
Prior to 1901 the American and Continental tobacco 
companies manufactured, sold, and distributed cigars, 
stogies, and cheroots. In the year stated the 
tJrers^aiid companies determined to engage in the busi- 
dealers in ness upon a larger scale. Under agreement 
cigars are ^ith Powell, Smith & Company, large manu- 
anT^the^Am. facturers and dealers in cigars, they caused the 
Cigar Co., is incorporation in New Jersey of the American 
formed, Cigar Company " for trading and manufac- 

turing," etc., to which all three conveyed their 
said business and it has since carried on the same. The 
American and Continental Companies each acquired 46J 
per cent of the shares, and Powell, Smith & Company 7 
per cent; the original capitalization was $10,000,000 (after- 
wards $20,000,000), and more than three-fourths is owned 



A MONOPOLISTIC CONTROL COMPANY 395 

by the former- The Cigar Company acquired many com- 
petitors (partnerships and corporations) engaged in inter- 
state and foreign commerce, taking from the parties cove- 
nants against engaging in the tobacco business; and it 
has also procured the organization of controlled corpora- 
tions which have acquired competing manufacturers, job- 
bers, and distributors in the United States, Cuba, and Porto 
Rico. It manufactures, sells and distributes a considerable 
percentage of domestic cigars; is the dominating factor in 
the tobacco business, foreign and domestic, in Cuba and 
Porto Rico, and is there engaged in tobacco planting. It 
also controls corporate jobbers in California, Alabama, Vir- 
ginia, Pennsylvania, Georgia, Louisiana, New Jersey, and 
Tennessee. 

" 4. The MacAndrews & Forbes Company — manu- 
jacturers of licorice: 

There is no question that licorice paste is an essential 
ingredient in the manufacture of plug tobacco, and that 
one who is debarred from obtaining such paste 
Secures would therefore be unable to engage in or 

the carry on the manufacture of such product, 

manufacture The control over this article was thus secured: 
(1902)!'''^' In May, 1902, the Continental Company se- 
cured control of MacAndrews and Forbes Co., 
of Newark, New Jersey, and organized ' for trading and 
manufacturing ' a corporation known as the MacAndrews 
& Forbes Co., with a capital of $7,000,000, $4,000,000 pre- 
ferred and $3,000,000 in common, which took over the busi- 
ness of MacAndrews and Forbes and another large com- 
petitor. The Continental Company acquired two-thirds of 
the common stock by agreeing to purchase its supply of 
paste from the new company. The American Tobacco 
Company, at the time of the filing the bill, was the owner 
of $2,112,900 of the common stock and $750,000 preferred. 
By various purchases and agreements the MacAndrews & 
Forbes Company acquired, substantially, the business of 
all competitors. Thus in June, 1902, it purchased the busi- 



396 COMBINATION ORGANIZATIONS 

ness of the Stamford Mfg. Co., of Stamford, Connecticut, 
and incorporated the National Licorice Company, which 
acquired the business of Young & Smylie and F. B. & V. P. 
Scudder, and the National Company agreed with Mac- 
Andrews & Forbes not to produce licorice for tobacco 
manufacturers. In 1906 all the stock in the J. S. Young 
Company ($1,800,000), which had been organized to take 
over the business of the J. S. Young Co., of Baltimore, Md., 
was acquired by the MacAndrews & Forbes Co. The Mac- 
Andrews & Forbes Co., use in excess of 95 per cent of the 
licorice root consumed in the United States. 

" 5. American Stogie Company: 

In May, 1903, the American Cigar Company and the 
American and Continental Tobacco Companies caused the 
American Stogie Company to be incorporated 
Stogie Co. is ^^ ^^^ Jersey, with $11,979,000 capital, which 
formed to immediately took over the stogie and tobie 
take over the business of the companies named in exchange 
tobie foi" $8,206,275 stock and then in the usual 

business, ways acquired the business of others in the 
^ ^ ^* manufacture, sale and distribution of such 

products, with covenants not to compete. It acquired in 
exchange for $3,647,725 stock all shares of United States 
Cigar Company (which had previously acquired and owned 
the business of important competitors) and subsequently 
took the conveyance of the plant and assets. The majority 
shares always have been held by defendant, the American 
Cigar Company. 

" As we think the legitimate inferences deducible from 
the undisputed facts which we have thus stated will be 
_, sufficient to dispose of the controversy, we 

retail do not deem it necessary to expand this state- 

tobacco ment so as to cause it to embrace a recital of 

aca?^'^^ ^y of the undisputed facts concerning the entry of 
the United the American Tobacco Company into the re- 
Cigar tail tobacco trade through the acquisition of 

ores Co. ^ controlling interest in the stock of what is 



A MONOPOLISTIC CONTROL COMPANY 397 

known as the United Cigar Stores Company, as well as to 
some other subjects which for the sake of brevity we like- 
wise pass over, in order to come at once to a statement 
concerning the foreign companies. 



" The English Companies: 

In September, 1901, the American Tobacco Co., pur- 
chased for $5,347,000 a Liverpool (Eng.) corporation, 
known as Ogden's Limited, there engaged in 
English manufacturing and distributing tobacco prod- 

market, ucts. A trade conflict which at once ensued 

(1901). caused many of the English manufacturers to 

combine into an incorporation known as the Imperial 
Tobacco Company of Great Britian and Ireland, capital 
15,000,000, afterwards increased to 18,000,000, pounds 
sterling. The trade w^ar was continued between this cor- 
poration and the American Tobacco Company, with a 
result substantially identical with that which had hitherto, 
as we have seen, arisen from such a situation. 

" In September, 1902, the Imperial and the American 
companies entered into contracts (executed in England) 
. stipulating that the former should limit its 
agreements business to the United Kingdom, except pur- 
with English chasing leaf in the United States (it buys 
diSr^the *° 54,000,000 pounds annually) ; that the Ameri- 
world's can companies should limit their business to 

market. The the United States, its dependencies and Cuba; 
Amerk'an ^^^ ^^^^ ^^^ British-American Tobacco Com- 
Tobacco Co. pany, with capital of 6,000,000 pounds sterling 
is formed, apportioned between them, should be or- 
^ ^^^^* ganized, take over the export business of both, 

and operate in other countries, etc. This arrangement was 
immediately put into effect and has been observed. 

" The Imperial Company holds one-third and the Ameri- 
can Company two-thirds of the capital stock of the British- 
American Tobacco Company, Limited. The latter com- 
pany maintains a branch office in New York City and the 



398 COMBINATION ORGANIZATIONS 

vice-president of the American Tobacco Company is a 
principal officer. This company uses large quantities of 
domestic leaf, partly exported to various plants abroad and 
about half manufactured here and then exported. By 
agreement, all this is purchased through the American 
Tobacco Company. In addition to many plants abroad it 
has warehouses in various states and plants at Petersburg, 
Va., and Durham, N. C, where tobacco is manufactured 
and then exported. 

^' The purchase of necessary leaf tobacco in the United 
States by the Imperial Company is now made through a 
resident general agent and is exported as a part of foreign 
commerce. 

^' Not to break the continuity of the narrative of facts 
we have omitted in the proper chronological order to 
state the facts relative to what was known as the Consoli- 
dated Tobacco Company. We now particularly refer to 
that subject. 

" The Consolidated Tobacco Co.: 

In June, 1901, parties largely interested in the American 
and Continental companies caused the incorporation in 
New Jersey of the Consolidated Tobacco Com- 
Consolidated pany, capital $30,000,000 (afterwards $40,- 
Tobacco Co. 000,000), with broad powers and perpetual ex- 
to ^centralize istence; to do business throughout the world, 
control, and to guarantee securities of other companies, 

(1901). g^c. A majority of shares was taken by a few 

individuals connected with the old concerns: A. N. Brady, 
F. B. Duke, A. H. Payne, Thomas Ryan, W. C. Whitney, 
and P. A. B. Widener. J. B. Duke, president of both the 
old companies, became president of the Consolidated. 
Largely in exchange for bonds the new company acquired 
substantially all the shares of common stock of the old 
ones. Its business, of holding and financing, was continued 
until 1904, when with the American and Continental Com- 
panies, it was merged into the present American Tobacco 
Company. 



A MONOPOLISTIC CONTROL COMPANY 399 

" By proceedings in New Jersey, October, 1904, the (old) 
.pjjg American Tobacco Company, Continental 

Consolidated, Tobacco Company, and Consolidated Tobacco 
the Company, were merged into one corporation, 

and^thT^oYd under the name of The American Tobacco 
Am. Tob. Co. Company, the principal defendant here. The 
^^f "^!^^^^ merged company, with perpetual existence, 
Am. Toba^w was capitalized ^ at $180,000,000 ($80,000,000 
Co., (1904). preferred, ordinarily without power to vote). 

'^ The powers conferred by the charter are stated in the 
margin.^ 

" Prior to the merger the Consolidated Tobacco Com- 
pany, a majority of whose $40,000,000 share capital was 
held by J. B. Duke, Thomas F. Ryan, William C. Whitney, 
Antony N. Brady, Peter A. B. Widener and Oliver H. 
Payne, had acquired, as already stated, nearly all common 
shares of both old American and Continental companies, 
and thereby control. The preferred shares, however, were 
held by many individuals. Through the method of distri- 
bution of the stock of the new company, in exchange for 
shares in the old American and in the Continental Com- 
pany it resulted that the same six men in control of the 
combination through the Consolidated Tobacco Company 
continued that control by ownership of stock in the merged 
or new American Tobacco Company. The assets, property, 

6 To buy, manufacture, sell and otherwise deal in tobacco and the 

products of tobacco in any and all forms ; to guarantee 

dividends on any shares of the capital stock of any corporation in 
which said merged corporation has an interest as stockholder; 

to carry on any business operations deemed by such merged 

corporation to be necessary or advisable in connection with any 
of the objects of its incorporation or in furtherance of any there- 
of, or tending to increase the value of its property or stock; 

to conduct business in all other States, territories, possessions and 
dependencies of the United States of America, and in all foreign 

countries; to purchase or otherwise acquire and hold, sell, 

assign, transfer, mortgage, pledge, or otherwise dispose of the 
shares of the capital stock or of any bonds, securities, or other 
evidence of indebtedness created by any other corporation or corpo- 
rations of this or any other State or government, and to issue its 
own obligations in payment or exchange therefor 



400 COMBINATION ORGANIZATIONS 

etc., of the old companies passed to the American Tobacco 
Company (merged), which has since carried on the 
business. 

" The record indisputably discloses that after this merger 
the same methods which were used from the beginning con- 
tinued to be employed. Thus, it is beyond dispute: First, 
that since the organization of the new American Tobacco 
Company that company has acquired four large tobacco 
concerns, that restrictive covenants against engaging in the 
tobacco business were taken from the sellers, and that the 
plants were not continued in operation but were at once 
abandoned. Second, that the new company has besides 
acquired control of eight additional concerns, the business 
of such concerns being now carried on by four separate 
corporations, all absolutely controlled by the American 
Tobacco Company, although the connection as to two of 
these Companies with that corporation was long and per- 
sistently denied. 

*■*•»** 

" Thus reaching the end of the second period and coming 
to the time of the bringing of the suit, brevity prevents us 
from stopping to portray the difference between the con- 
dition in 1890 when the (old) American Tobacco Company 
was organized by the consolidation of five competing 
cigarette concerns and that which existed at the commence- 
ment of the suit- That situation and the vast power which 
the principal and accessory corporate defendants and the 
small number of individuals who own a majority of the 
common stock of the new American Tobacco Company 
exert over the marketing of tobacco as a raw product, its 
manufacture, its marketing when manufactured and its 
consequent movement in the channels of interstate com- 
merce indeed relatively over foreign commerce and the 
commerce of the whole world, in the raw and manufactured 
products stand out in such bold relief from the undisputed 
facts which have been stated as to lead us to pass at once 
to the second fundamental proposition which we are re- 
quired to consider. That is, the construction of the Anti- 



A MONOPOLISTIC CONTROL COMPANY 401 

Trust Act and the application of the act as rightly con- 
strued to the situation as proven in consequence of having 




determined the ultimate and final inferences properly de- 
ducible from the undisputed facts which we have stated." 



402 COMBINATION ORGANIZATIONS 

" Considering then the undisputed facts which we have 
previously stated, it remains only to determine whether 
they establish that the acts, contracts, agree- 
^preme ments, combinations, etc., which were assailed 
Court were of such an unusual and wrongful char- 

ordered the ^Q^Qj. ^g ^Q bring them within the prohibitions 
of^the^ ^^^ of ^he law. That they were, in our opinion, 
tobacco so overwhelmingly results from the undisputed 

combine. i^cts that it seems only necessary to refer to 
the facts as we have stated them to demonstrate the 
correctness of this conclusion. Indeed, the history of the 
combination is so replete with the doing of acts which it 
was the obvious purpose of the statute to forbid, so demon- 
strative of the existence from the beginning of a purpose 
to acquire dominion and control of the tobacco trade, not 
by the mere exertion of the ordinary right to contract and 
to trade, but by methods devised in order to monopolize 
the trade by driving competitors out of business, which 
were ruthlessly carried out upon the assumption that to 
work upon the fears or play upon the cupidity of com- 
petitors would make success possible. We say these con- 
clusions are inevitable, not because of the vast amount 
of property aggregated by the combination, not because 
alone of the many corporations which the proof shows were 
united by resort to one device or another. Again, not alone 
because of the dominion and control over the tobacco trade 
which actually exists, but because we think the conclusion 
of wrongful purpose and illegal combination is overwhelm- 
ingly established by the following considerations: 

" (a) By the fact that the very first organization or 
combination was impelled by a previously existing fierce 
trade war, evidently inspired by one or more of the minds 
which brought about and became parties to that 
combination. 

" (b) Because, immediately after that combination and 
the increase of capital which followed, the acts which en- 
sued justify the inference that the intention existed to use 
the power of the combination as a vantage ground to 



A MONOPOLISTIC CONTROL COMPANY 403 

further monopolize the trade in tobacco by means of trade 
conflicts designed to injure others, either by driving com- 
petitors out of business or compelling them to become 
parties to a combination — a purpose whose execution was 
illustrated by the plug war which ensued and its results, 
by the snuff war which followed and its results, and by the 
conflict which immediately followed the entry of the com- 
bination in England and the division of the world's business 
by the two foreign contracts w^hich ensued. 

" (c) By the ever-present manifestation which is ex- 
hibited of a conscious wrong-doing by the firm in which 
the various transactions were embodied from the beginning, 
ever changing but ever in substance the same. Now the 
organization of a new company, now the control exerted 
by the taking of stock in one or another or in several, so 
as to obscure the result actually attained, nevertheless 
uniform, in their manifestations of the purpose to restrain 
others and to monopolize and retain power in the hands 
of the few who it would seem, from the beginning con- 
templated the mastery of the trade wiiich practically 
followed. 

" (d) By the gradual absorption of control over all the 
elements essential to the successful manufacture of tobacco 
products, and placing such control in the hands of seem- 
ingly independent corporations serving as perpetual bar- 
riers to the entry of others into the tobacco trade. 

" (e) By persistent expenditure or millions upon millions 
of dollars in buying out plants, not for the purpose of uti- 
lizing them, but in order to close them up and render them 
useless for the purposes of trade. 

" (/) By constantly recurring stipulations, whose le- 
gality, isolatedly viewed, we are not considering, by which 
numbers of persons, whether manufacturers, stockholders 
or employees, were required to bind themselves, generally 
for long periods, not to compete in the future. Indeed, 
when the results of the undisputed proof which we have 
stated are fully apprehended, and the wrongful acts which 
they exhibit are considered, there comes inevitably to the 
mind the conviction that it was the danger which it was 



404 COMBINATION ORGANIZATIONS 

deemed would arise to individual liberty and the public 
well-being from acts like those which this record exhibits, 
which led the legislative mind to conceive and to enact 
the Anti-Trust Act, considerations which only serve to 
clearly demonstrate that the combination here assailed is 
within the law as to leave no doubt that it is our plain duty 
to apply its prohibitions." 



PART V 

ABUSES OF OWNERSHIP ORGANIZATION 
AND ATTEMPTS TO REMEDY THEM 



CHAPTER XX 

ABUSES AND WEAKNESSES OF THE AMERICAN SYSTEM 

During the past three decades many laws have been 
enacted by congress and the state legislatures that place 
restrictions upon the freedom of action of business owner- 
ship organizations. The state of Ohio was one of the first 
to enter the lists against big business when it brought suit 
against the Standard Oil Company of Ohio, to force dis- 
solution of the Standard Oil Trust, of 1882. Within a com- 
paratively short time other states followed this lead by 
enacting anti-trust legislation, and even the federal con- 
gress was prevailed upon to pass the Sherman Anti-Trust 
Act. From then on there has been a continual fight raging 
in our legislative bodies to correct abuses and to combat 
evils that have crept into the ownership organization. At 
times this has taken the form of investigations by com- 
mittees and bureaus whose reports have been highly en- 
lightening. Among them we find the 1900 report of the 
United States Industrial Commission, consisting of some 
19 volumes; that of the Hughes' Commission of the state 
of New York which laid bare the connections of the great 
insurance companies with big business in the matter of 
finance and control; the voluminous reports of the Pujo 
Commission concerning the so-called '^ Money Trust"; the 
many reports of the United States Bureau of Corporations, 
and more recently those of the Federal Trade Commission. 
Prosecutions have also been numerous both in the state 
and the federal courts. Their reports are filled with de- 
cisions condemning in no doubtful way certain methods 

407 



408 OWNERSHIP ORGANIZATION ABUSES 

and practices that have been employed by our large and 
small business organizations. 

These events and acts permit of but one interpretation, 
namely, that there is something wrong in our system of 
ownership organization. It does not conform in full to 
our sense of business ethics and morals. It is experiencing 
difficulty in adjusting a new order of organization to our 
ideas of propriety as dictated by our laws and customs. 
Consequently there is ever a tendency to violate the exist- 
ing laws. Big business units have been perhaps somewhat 
more culpable in this than have the smaller ones. The 
former through their control of our basic industries exer- 
cise a potent influence upon our daily lives and upon busi- 
ness in general. They are constantly in the public eye. 
The errors that they commit are seized upon by the pub- 
licist and are prominently displayed in newspapers and 
periodicals. For that reason, but not without some justi- 
fication, has the general public come to view our big 
business organizations from a critical angle. 

What then, are some of the acts and abuses that have 
called forth this deluge of criticism? 

Acts and Abuses Leading to Criticism 

Generally speaking, the criticism directed against the 
ownership organization centers upon six things, namely: 
(1) The methods of administration and control; (2) the 
methods and practices of promotion and finance; (3) finan- 
cial management; (4) speculation; (5) unfair methods of 
competition; and (6) monopolies and combinations in re- 
straint of trade. 

1. Administrative Abuses. — From the standpoint of 
administration and control business has laid itself open 
to criticism, not so much because of the direct violations of 
law, but rather because the law has been so lax that it has 
permitted pernicious practices and abuses to spring up and 



ABUSES AND WEAKNESSES 409 

has countenanced and tolerated them until public opinion 
has revolted. While there are many of these laxities of 
law, a few have stood out more prominently than others. 
Since most of them have been pointed out here and there 
in the preceding chapters it will suffice at this point merely 
to bring them together in the form of a summary. 

(a) The ease with which stock may be transferred has 
made it possible for the criminally inclined manipulator to 
organize a company which he knows to be unsound, to re- 
serve for himself a large block of the stock and to dispose 
of his interest at a good profit when the propitious moment 
arrives. In this way those who have organized the com- 
pany, and upon whom the responsibility for its conduct 
should rest, are enabled to slip out before the collapse 
comes. 

{b) The small holdings required of directors have also 
caused criticism. Through dummy, or controlled directors 
a small group of stockholders may retain control over the 
affairs of a large corporation. They can then cause it to 
be managed for their own personal profit to the detriment 
of the whole body of stockholders. There may be some 
advantage in this in so far as it will permit of greater free- 
dom in hiring executive and administrative ability. It is, 
nevertheless, objectionable because the laws in most states 
are not such as to hold the directors both civilly and crim- 
inally responsible for their acts. The remedy, then, does 
not appear to be in the direction of more stringent require- 
ments as to qualifications of directors. They must be 
made responsible to stockholders and creditors for their 
acts. 

(c) The inadequate representation of minorities is an- 
other point upon which criticism centers. Under the ordi- 
nary system of voting those who can secure by ownership 
or proxy the right to vote 51 per cent of the voting stock 
have the right to fill all places on the board of directors. 



410 OWNERSHIP ORGANIZATION ABUSES 

They may in this way exclude the minority from voicing 
its opinion or being represented on the board of control. 
Such a condition has frequently led to factional fights 
among the stockholders which have been carried to the 
highest courts. Often enough, in such cases, has the 
minority been sustained in its claim of mismanagement. 
The best remedy is to assure the minority of adequate 
proportional representation. To this end many states have 
adopted legislation which in some cases prescribes, and in 
others permits of, the use of the cumulative method of 
voting. Other states, however, have let this abuse go un- 
checked by remedial laws. Under this condition the incor- 
porators may choose the practice that is to prevail. 

[d) The privilege of proxy has also been abused. 
Strong, well-organized minorities owning from 25 to 30 per 
cent of the voting stock have found it easy to maintain 
themselves in control of the corporation for long periods 
of years through the use of long-time proxies. Here also, 
several states have taken action limiting the life of a proxy 
to a single election, but they are very few in number. 

(e) The large number of stockholders and their remote- 
ness from the seat of activity of the enterprise in which 
they are interested is another contributing influence. The 
tens of thousands of stockholders of our larger corporations 
are scattered throughout the forty-eight states and many 
foreign countries. It is impossible for them to come to- 
gether at stated intervals to discuss the affairs of the busi- 
nesses. Many of them have no interest in the manage- 
ment and do not care to assiftne the burden of active 
participation in the corporate affairs. Many of them hold 
the stock for speculative purposes solely, expecting to make 
a profit, not from dividends, but from a resale of the stock. 
Others, while they are bona-fide investors who hold stock 
for the sake of dividends, are perfectly content to let those 
who have the power control the policies of the corporation 



ABUSES AND WEAKNESSES 411 

and give their proxies freely or abstain entirely from vot- 
ing. These circumstances frequently lead to abuses per- 
petrated by a small, well-organized group of stockholders, 
whereby such a group seeks gain, irrespective of the effect 
of their acts upon the great body of more or less 
disinterested stockholders. 

(/) Furthermore, in most of the states there are no 
definite responsibilities placed upon officers and directors. 
In but a very few are they made both civilly and crimi- 
nally liable for infractions of the law. And even where 
there are such laws, the lack of interest, coupled with an 
amazing ignorance of their lawful rights on the part of the 
stockholders, permits the criminally inclined to defraud 
them without being brought to justice for their misdeeds. 

2. Abuses Arising out of Methods of Promoting and 
Financing Companies. — The manner in which most of 
our larger business companies have been promoted and 
financed has been, and still is, the cause of much justifiable 
criticism. Legislatures have erected few, if any, safe- 
guards against the wild extravagance and unsound prac- 
tices that have characterized this feature of the formation 
and operation of our corporations in general. Many of 
them, organized since 1890, have been highly speculative 
ventures that, from the beginning, had little chance of 
success. They floundered along for a few brief years, 
attempting through speculation and other questionable 
practices to maintain themselves, only in the end to be re- 
organized or to become bankrupts and to disappear. Un- 
wise promotion, poor, and sometimes even fraudulent, 
financing and orgies of speculation have marked their 
lives. Many of these abuses have been brought to light 
through the reports of government bureaus, special inves- 
tigation conunittees, court proceedings and accounts car- 
ried in financial publications. It is quite out of the ques- 
tion to treat them in full in this work, for they are the 



412 OWNERSHIP ORGANIZATION ABUSES 

proper subject matter for a treatise on corporation finance. 
Nevertheless, they have functioned so prominently in the 
development of the modern ownership organization in the 
United States that they can not be passed by without a 
word or two of explanation. 

(a) Unwise promotion. As has already been explained, 
the work of promotion consists essentially of securing 
options on the properties to be acquired by the proposed 
new business, of making provisions for financing and under- 
writing the issues of securities, of organizing the new com- 
pany under an appropriate charter, of selling the optioned 
properties to the company and lastly, of inducing the 
public to buy the securities from the underwriters. This 
process frequently has been accompanied by an extravagant 
use of capitalization, huge profits for the promoters and 
underwriters and heavy losses for the investors. 

The method is admirably summarized by Professor A. 
S. Dewing, in a study of the promotions and reorganiza- 
tions of some eighteen large companies in the following 
words: ^ ''The tangible assets averaged 40% of the total 
issued securities. The remaining 60%, representing 
usually the overlying stocks, was distributed among five 
separable interests, although in the majority of cases one 
or more were merged. These five interests were (1) the 
promoter who secured the options, (2) the banker who 
stood god-father for the enterprise or underwrote its securi- 
ties, (3) the manufacturers who received a price for their 
plants in excess of their value, (4) the public who received 
a bonus of common stock for purchasing the securities of 
the enterprise, (5) the attorneys and others who did the 
work of incorporating the consolidation. Looking at the 
matter still in terms of a typical promotion, it would ap- 
pear that of the 60% in securities above the value of the 

1 A. S. Dewing, Corporate Promotions and Reorganizations. 
Pp. 540-541. 



ABUSES AND WEAKNESSES 413 

property, 10% went to the promoter for his service, 10% 
to the banker for his services, 20% to the manufacturers 
as a gift in excess of the value paid for their plants, 15% 
to the public as ' bait ' to induce the purchase of the securi- 
ties and 5% for the direct labor incident to incorporation. 
Such figures represent the roughest approximation. They 
are susceptible to infinite variations according to the pro- 
portions of the bonds and stocks, to the period of promo- 
tion, to the kind of industry, to the prevailing sentiment 
of the public. As rough approximations, however, they 
are believed to be fair statements of average conditions." 

{b) Over-Capitalization. In most of the cases described 
by Dewing, practically all of the common stock was 
" water " and on the average the actual value of the prop- 
erty acquired by these companies did not exceed the par 
value of the preferred stock issued against it. As a result, 
tens of millions of dollars in worthless stocks were foisted 
off upon the public. In very few instances, indeed, did 
the new large scale business enterprise grow rapidly enough 
to fill out the financial clothes that had so generously been 
supplied to it by the promoter and the underwriting 
syndicate. 

The responsibility for this state of affairs rests by no 
means upon the promoter alone. These great enterprises 
could not have been built up without the support and 
assistance of financiers who could furnish the necessary 
funds within the short period of time required. The 
assembling of funds was a joint enterprise in which a large 
number of financiers had to participate. The large profit 
resulting from a successful underwriting venture was worth 
the risk of loss. But the chance for success was better 
if a large number of banking houses could be brought into 
the syndicate. There remained then less to criticise. Once 
having participated in a syndicate the smaller banking 
houses in provincial districts were obliged thereafter to 



414 OWNERSHIP ORGANIZATION ABUSES 

accept any and all offers to become syndicate members 
and to subscribe to the securities of good or bad concerns 
without distinction. For, if they objected to the bad pro- 
motions, they were denied a share in the good ones. 

(c) Influence of Life Insurance Companies. Up to 1906, 
the peculiar situation of the life insurance companies also 
played an important part in the matter of promotions. 
In the first place, little short of a monopoly in the writing 
of life insurance had come into the hands of the Equitable, 
the New York Life and the Mutual companies. They were 
receiving money faster than they could invest it. At times 
the Equitable alone had from 30 to 40 million dollars in 
cash lying uninvested in New York banks. This money 
was borrowed by the banking syndicates for temporary 
use in underwriting. Some of the life insurance companies 
even engaged directly in this work under assumed names. 
The New York Life Insurance Company, for example, did 
so under the name " Milik." With all, they furnished 
the syndicates with a ready market for their securities 
and by 1904 the three companies mentioned above had 
invested in stocks and bonds whose aggragate par value 
was in excess of one billion dollars.^ The result was to 
force the insurance companies to join the bankers in specu- 
lative manipulation of the market. 

(d) Supporting the Market. The promotion is not a 
success from the underwriters' standpoint unless the securi- 
ties can be sold at a profit to the public. In order 
to facilitate their sale, the price of the securities must be 
kept up. For this purpose the services of a large number 
of experts were employed to manipulate the Stock Ex- 
change. They call it " supporting the market." The stock 
must be sold at a price agreed upon as a minimum by the 
syndicate. If it then appears on the market at less than 

2 Reports of the committee of the New York Legislature. New 
York Life Insurance Investigation, 1906. 



ABUSES AND WEAKNESSES 415 

this amount, it must be bought up. In this way they work 
off their securities and gently inject them into circulation- 
The practice is also known as making " wash sales." 

Thus, in the reports of the Pujo Commission, the number 
of shares bought and sold by the syndicate in the promotion 
of the California Patents Company are shown as follows: 







Bought 


Sold 


October 


5 


6,000 


11,200 


« 


7 


8,900 


4,000 


« 


10 


13,000 


17,000 


it 


22 


6,400 


10.900 



24,300 43,100 

As a result of these wash sales, the net sales were not 
43,100 shares, but only 18,800 shares. 

(e) Profits of Underwriting. A great deal of criticism 
has also been directed against the profits of the under- 
writers. Their profits, to be sure, have been large at times. 
Yet, they are highly problematical, for they are in part a 
payment for the assumption of an extraordinary risk, and 
not all underwriting ventures prove to be successful. 

In the case of the United States Steel Corporation the 
underwriters received a bonus of $25,000,000 in stock and 
their total profit may have been two or three times as great. 
The bankers who financed the United States Rubber Com- 
pany are reported to have received from the company for 
each $100 in cash one share of preferred and one share of 
common stock, each of the par value of $100. The pre- 
ferred stock they sold at $92 per share and the common 
at $29.25 per share. This gave them a return of $121.25 
for every $100 in cash turned over to the company.^ In 
the case of the American Smelting and Refining Company 
the underwriters' gross profit was approximately 15 per 
cent. These are not extraordinary cases; and they seem 

3 Commercial & Financial Chronicle, Sept. 15, 1915. 



416 OWNERSHIP ORGANIZATION ABUSES 

to indicate that the profits were large even after the 
expenses had been deducted from the gross profit. 

However, losses have, at times, also been large. In 
financing the International Pump Company the under- 
writers suffered a net loss of approximately $20 out of each 
$100 in cash furnished. And in the promotion of the 
American Malting Company their losses probably exceeded 
$70 out of the hundred. 

(/) Promoters^ Profits. Much has been said on the sub- 
ject of promoters' profits, particularly by Professor 
Dewing.* Their profits come in the main from two 
sources. In the first place, there is the legitimate profit 
derived from the sale of the securities that the promoter 
receives as his commission, which may amount to 10 per 
cent of the stock issued. In the second place, there is the 
illegitimate profit arising out of the practice of '^ milking 
the corporation," namely, the purchase of plants, etc., by 
the promoter and their resale by him at much advanced 
prices to the company which he is promoting. The latter 
practice has resulted several times in calling upon the 
courts to determine what constitutes a proper profit. As 
a result of one such case,^ the promoters of the Old 
Dominion Copper Mining & Smelting Company were 
obliged to pay $2,000,000 of illegitimate profits to the 
company. In both Germany and England steps have been 
taken to curb this practice through prescribed and other 
legal requirements. 

3. Abuses in Financial Management. — The financial 
management of the company following its promotion is 
equally as important to the general public and the security- 
holders, as the circumstances surrounding its formation. 
Our large corporations are managed either by business 
men, or bankers, or both. The bankers who were origi- 

* A. S. Dewing, Corporate Promotions and Reorganizations. 
5 Journal of Political Economy, 1900, p. 535. 



o 

UJ < 

^^ id 



n 

Z CD 





rf 




d 








tn 


i 




ji 


►^ 


27, 


s 




g 


1 


i 



CHART SHOWING THE CLOSE INTERRELATION 

EXISTING BETWEEN THE RAILROAD, 

RAILROAD EQUIPMENT AND 

FINANCIAL COMPANIES 

OFTHE UNITED STATES 

IN 1920 




; used by W. Jet.t L 

tJiat a gi-oup of New York fi: 

ntrolled the railroads and great iudittrial companies of the United States. 

originally published in the Congressional Record of March 14, 1920, in illustration of 

the Money Tnist by Senator LaFollette, it shows ten additional 
panies that have here been omitted. 



ABUSES AND WEAKNESSES 417 

nally called upon to finance the company during the period 
of promotion frequently retain control over it and direct 
its operations afterwards. Indeed, instances are not lack- 
ing where not only the original financing, but also the sub- 
sequent financial management, was carried on primarily 
for the benefit of Wall Street and to the detriment of the 
best interests of the business itself. This appears to have 
been largely the case with the Rock Island Company, 
whose failure in 1915 is generally attributed to banker 
management. On the other hand, where these great busi- 
nesses remained more or less exclusively in the hands of 
business men they soon found themselves in financial straits. 
Large business enterprises are in constant need of financing 
for purpose of development and to enable many of them 
to create a market for their products. Hence, they must 
have the advice and assistance of the bankers. Ignorance 
of banking methods, of credits and of financing through 
the substitution of securities on the part of the man- 
agement of the Westinghouse Electric and Manu- 
facturing Company was largely the cause of its fail- 
ure in 1907. The same thing was true of the old 
Claflin Company. 

It is thus seen that some failures have been attributable 
to too much banker management and others to too little. 
It is hardly necessary to point out that there is a happy 
mediimi. Success in modern business, especially where 
the instrimientalities of organization consist of securities, 
depends to an extraordinary degree upon a sound finan- 
cial policy — a policy that will win the support not only 
of the banking interests but also of the investing 
public. 

Considered in this light, the financial policy of the 
United States Steel Corporation, exclusive of its promotion, 
has been exceptionally sound. Handicapped in the begin- 
ning by heavy over-capitalization which seriously threat- 



418 OWNERSHIP ORGANIZATION ABUSES 

ened its existence, it has gradually overcome its difficulties 
and is today probably the most powerful corporation in 
existence. Its success in this respect is in no small degree 
attributable to a combination of excellent industrial man- 
agerial ability of such men as Schwab, Corry and Farrell 
with the financial acumen of Judge Gary. But even this 
great corporation found it necessary to indulge in financial 
manipulation to lessen somewhat the burden of over- 
capitalization under which it labored- 
Even today, the management of most of our great business 
enterprises conducted under the corporate form of organiza- 
tion is still too much in the hands of financiers to the 
exclusion of men who are equipped with the proper tech- 
nical and industrial training. This is particularly true 
of our railway and railway equipment companies; a 
fact that is clearly brought out by the accompany- 
ing chart. 

(a) Financial readjustments. — If the enterprise is 
heavily over-capitalized it must sooner or later effect a read- 
justment. Its financial clothes are too large for it and it 
must increase its assets or earning power to fill them, or the 
clothes must be trimmed down to fit the earning power of 
the corporation. The latter practice seems to have been 
the more common in this country, where conversions and 
reorganizations have been frequent. 

The principle underlying both the conversion and the 
reorganization is that of substituting one type of security 
for another. In the case of a conversion a stock bearing 
a high rate of dividends may be retired by exchanging for 
it a bond bearing a low interest rate; but the reorganiza- 
tion is the more drastic and usually entails the cancellation 
of all or a large part of the common stock, and at times, 
even of the preferred stock. In either case the security 
holders usually lose heavily, because the securities, as a 
rule, will have been sold by the original holders to other 



I 



ABUSES AND WEAKNESSES 419 

persons for cash. It is only rarely that the original 
holders suffer. 

(6) Conversions. — In 1902, the Steel Corporation 
launched its famous bond conversion plan about which there 
has been so much controversy. The corporation needed 
$50,000,000 of new capital, but the members of the syndi- 
cate still held enormous quantities of preferred stock which 
they had been unable to sell to the public. A new issue 
of securities to add to those already outstanding was out 
of the question. The plan adopted proposed " to rearrange 
your corporation's capitalization (which in round numbers 
now consists of $300,000,000 of bonds, $500,000,000 of pre- 
ferred stock, and $500,000,000 of common stock) by sub- 
stituting for $200,000,000 of the preferred stock, $200,000,- 
000 of sinking fund sixty year 5 per cent mortgage gold 
bonds, and by selling $50,000,000 of additional bonds of 
such issue for cash. As the preferred stock carries 7 per 
cent dividends, while the bonds would bear but 5 per cent 
interest, the $50,000,000 desired could, in this way, be 
added to the corporate resources, and the aggregate of 
annual charges for interest and dividends, instead of being 
increased $3,500,000 would be decreased $1,500,000 as com- 
pared with the present sum total of these two require- 
ments." ^ The plan was not well received by the stock- 
holders who were expected to give up a 7 per cent security 
for one paying but 5 per cent, and after about $150,000,000 
of the preferred stock had been converted the plan was 
dropped. 

Numerous other big companies, instead of attacking the 
problem of over-capitalization at once, permitted the 
claims of the preferred stockholders against the earnings 
of the company to cumulate until they even exceeded the 

6 An account of this bond conversion will be found in the 
Quarterly Journal of Economics, Vol. XVIII, 1903, pp. 22-53; also 
in Ripley, Trusts, Pools and Corporations, 



420 OWNERSHIP ORGANIZATION ABUSES 

total par value of the outstanding stock of this class. In 
the case of the old United States Leather Company, or- 
ganized in 1893, the unpaid dividends due the preferred 
stockholders accumulated rapidly. By 1905, they 
amounted to 41 per cent of the par value of the stock. 
In 1906, the company was reorganized, the common stock- 
holders were asked to surrender some 70 per cent of their 
stock and the preferred stockholders received about 75 
cents on the dollar out of their accrued dividends, part of 
it in the form of new common stock.'' 

(c) Reorganizations. — Reorganizations are the usual 
results of business failure, that is, the failure of the earnings 
to support the burden of charges that were placed upon 
them. It is a historical fact that many of the great indus- 
trial combinations formed during the early and late nineties 
had to undergo one or more reorganizations because of an 
actual or threatened condition of insolvency due to finan- 
cial embarrassment. According to Dewing,^ " these finan- 
cial difficulties were not the consequence of over-capitaliza- 
tion as is usually alleged. These corporations did not fail 
because the capitalization items were large or small. They 
failed because their earnings were inadequate for the load 
put upon them. If the load was especially burdensome 
by reason of heavy fixed charges and unwarranted dividend 
payments, the failure was all the more certain. The direct 
cause of failure in every instance was the deflection of 
working capital to the payment of interest and dividends. 
Beneath this, as the fundamental cause, was the lack of 
judgment of promoters in placing bonds upon an untried 
industrial enterprise and lack of conservatism of the early 
management in paying dividends without due regard to 
sound principles of finance. Every corporation discussed 
. . . paid out interest and dividends in the face of falling 

7 Dewing, Corporate Promotions and Reorganizations. 

8 Ibid., pp. 557 et seq. 



ABUSES AND WEAKNESSES 421 

earnings, and none need have suffered serious financial 
difficulties had the amounts paid in interest and dividends 
been conserved. Many industrial consolidations more ex- 
travagantly promoted, with far greater discrepancies be- 
tween assets and capitalization, have continued in business 
uninterruptedly to the present time and are prosperous, 
because their promoters issued no bonds and their 
directors exercised a wise conservatism." 

The same writer is of the opinion that these failures 
were more fundamentally attributable to two sets of 
causes. " One psychological in character and concerned 
with the difficulties attending the administrative manage- 
ment of a large business. The other was economic in char- 
acter and concerned with the difficulties attending the 
creation of a business organization sufficiently powerful to 
dominate an industry in the presence of actual or potential 
competition." 

{d) Dividend Policies. — Aside from these abuses there 
are others that arise out of certain practices regarding the 
declaration and payment of dividends. 

(1) Failure to give proper recognition to depreciation 
of assets has been extremely common. According to 
former Chairman Hurley of the Federal Trade Board, out 
of 60,000 corporations fully one-half failed entirely to 
recognize the factor of depreciation in their accounts. 
This, in view of over-capitalization, is a serious condition. 
Even in the case of corporations that have " wasting 
assets " such as bodies of ore, stands of timber, veins of 
coal, etc., far too little attention is paid to this aspect of 
accounting. Under such conditions the declaration of 
dividends frequently involves the impairment of assets. 
This practice, for instance, figured prominently in the 
failures of the United States Realty Company, the National 
Starch Company and others.^ But in justice, it must be 

9 Ihid. 



422 OWNERSHIP ORGANIZATION ABUSES 

said that the stronger, more conservative, corporations 
follow a rigorous policy of setting aside annually a portion 
of earnings as a replacement reserve. 

(2) Failure to distinguish between capital and income in 
the declaration of dividends has wrecked many a corpora- 
tion in its infancy. For example, the directors of the old 
American Malting Company, in spite of the fact that it 
was highly over-capitalized, succeeded in giving it a seem- 
ing prosperity by declaring dividends out of assets. The 
scheme was finally discovered by the stockholders who then 
brought suit against the directors to compel them to restore 
to the company the funds thus misapplied. The trial court 
sustained the directors, but the Supreme Court of the state 
of New Jersey reversed this decision on the ground that the 
original stockholders will change and the new ones would 
be the ones to suffer, and that the directors also would 
thereby be permited to create a fictitious prosperity and 
then to sell their holdings in the injured corporation to 
others who were in no position to know that the capital had 
been impaired. The court, therefore, ordered the directors 
to reimburse the company .^° The same practice forced the 
Consolidated Lake Superior Company into bankruptcy in 
1902, and the United States Finishing Company in 1913. 
In the latter case it was reported that the directors had 
lifted about $1,250,000 out of the capital and had dis- 
tributed this as dividends.^^ 

(3) Insufficient distinction is made between surplus and 
undivided profits. The surplus may be in the form of in- 
vestments of various kinds, while the undivided profits are 
cash earnings susceptible to distribution in the form of divi- 
dends. It frequently happens that a corporation has a 
large surplus but its earnings for the fiscal period have 

10 Ibid. 

11 See reports concerning these companies in the Commercial & 
Financial Chronicle, 1902 and 1913. 



ABUSES AND WEAKNESSES 423 

been insufficient to enable it to declare its regular divi- 
dends. In such cases, some companies have borrowed 
money through the issue of purchase-money bonds and 
have paid the dividends out of this. The question arises, 
whether this is an impairment of capital. It would seem 
that the safer procedure would be to declare a scrip divi- 
dend. This is now usually done under such circumstances. 

(4) Another important question is whether an over- 
capitalized corporation may pay dividends out of earnings 
before it has brought its assets up to its capitalization. 
A number of cases have been brought to court on this point. 
In many of them, notably one brought against the direc- 
tors of the National Wall Paper Company in New Jersey in 
1907, the court held that the capital account and the divi- 
dend account may be kept separately, and that the stock- 
holders may not secure an order restraining directors from 
declaring dividends out of earnings even when a condition 
of over-capitalization exists. This is, then, not a matter in 
which the courts will assume responsibility of protecting 
the stockholder, but remains a business risk of the investor. 

4. Speculation. — Speculation has been the bugbear of 
the business world ever since the introduction of securities 
as instrumentalities of organization. It thrives on the 
ease of transferablility of securities and active trading in 
them on exchanges where prices are quoted from day to day 
and hour to hour. From the days of John Law and his 
^' Mississippi Bubble," to the present time, it has called 
forth a deluge of criticism resulting in legislative enact- 
ments of a more or less regulatory character. 

A speculative interest in securities is essentially different 
from an entrepreneurial interest. The latter centers upon 
the earnings accruing to the invested capital underlying the 
securities, while the former rests upon changes in their 
market price as quoted on exchanges. The speculator, 
therefore, is not primarily interested in the condition of the 



424 OWNERSHIP ORGANIZATION ABUSES 

business and its profits but in its securities as commodities 
in themselves, commodities that may be bought and sold 
like so many bushels of wheat. 

Professional and amateur speculators abound. They are 
ordinarily divided into two classes: (1) bulls who buy 
securities with the expectation of being able to sell them 
at advanced prices and (2) bears who sell stocks in the 
hope of being able to rebuy them at reduced prices. Since 
a period of generally rising prices favors the first class, it is 
called a bull market and correspondingly a period of gen- 
erally falling prices is a bear market. Thus, one class 
attempts to bring about a rise in prices while the other 
tries to depress them. This frequently results in a " cor- 
ner " in a given security ; that is to say, a single speculator, 
or a group of them, obtains a practical monopoly of the 
available floating supply. One of the most notorious cor- 
ners of recent years was in the stock of the Stutz Motors 
Corporation during which the quoted prices rose from $89 
per share to the dizzy height of $730 per share. Such 
speculation in the securities of a company naturally does 
it little good. 

The great bulk of speculative transactions is carried 
on by means of borrowed money. The speculator ordi- 
narily pays from 10 to 15 per cent of the market price of 
the securities to the broker, who lends him the balance, re- 
taining possession of the stocks and bonds to support the 
loan. This method of speculation is called " playing on mar- 
gin." The broker, in order to get back his working capital, 
borrows from the banks by pledging the securities in his 
possession to support a " call loan," that is to say, a loan 
that does not run for a definite period of time but is sub- 
ject to termination whenever the bank sees fit to call it. 
In this way the banks become involved in the speculation, 
for they really furnish the money for it. Prior to the pas- 
sage of the Federal Reserve Banking Act, in 1913, there was 



ABUSES AND WEAKNESSES 425 

little opportunity to control the flow of funds that support 
the operations of speculators, but the Federal Reserve 
Board established by virtue of the act of 1913, now finds it 
possible to exercise some measure of control over this by 
raising or lowering the rediscount rates which influence the 
call loan rates. 

There are three kinds of speculation in securities; that 
carried on (1) by outsiders, (2) by insiders, and (3) by 
the companies themselves. Speculation by outsiders is 
very extensive, as may be seen by a glance at the table 
showing the turnover of securities of a number of large 
companies given in a preceding chapter.^^ By and large, 
this form of speculation serves a very useful purpose, but 
in a wasteful way. It makes it possible for underwriters 
who finance companies to dispose of their securities even 
though the investing public is not ready to buy them, and 
thus enables them to free their funds for further financing. 
But excessive speculation in the securities of a company 
tends to place it in bad repute with the investing and busi- 
ness public. Thus, in the years immediately following 
1896 the common stock of the United States Leather Com- 
pany was little more than the speculative dice of Wall 
Street. Ordinarily the stock had been quoted at from $5 
to $10 a share. In October of 1899, James R. Keene tried 
to " corner " the floating supply and by November 6th, the 
price had risen to $40.87. Two days later it had fallen 
back to $20 and by the end of the month it was again 
quoted at $10 per share. The original holders seized this 
brief opportunity to dispose of their common stock reserv- 
ing for themselves and their families the preferred issues.^^ 
The same thing happened to the stock of one of our big 
rubber companies^* and many others. 

12 Page 94. 

13 Dewing, Corporate Promotions and Reorganizations, pp. 24-25. 
1* Analyst, July, 1915. 



426 OWNERSHIP ORGANIZATION ABUSES 

Then too, the directors and officers of the company fre- 
quently have added to the stigma of speculation by arti- 
ficially influencing the price of its securities to their own 
advantage. Cases have come to the attention of the public 
where financial reports have been falsified, as in the old 
Whiskey Trust,^^ where dividends have been declared out 
of capital as in the National Cordage Company ^^ and 
where funds have been shifted between two or more com- 
panies to give a semblance of strength in order to enable 
the insiders to reap a speculative profit out of more or 
less worthless securities. In 1896, the same people who 
were in control of the Diamond Match Company also con- 
trolled the New York Biscuit Company, and in order to aid 
them in their speculation they shifted the combined funds 
of both companies first to support one and then the other, 
until finally both were in financial straits and the collapse 
came.^^ 

At times, those who are in control of a company may feel 
that it is necessary for them to take a hand in a speculative 
manipulation in order to protect the company. This may 
be justifiable, but it is a risky business that may do more 
harm than good. As a result of such a manipulation by 
Allen A. Ryan resulting in a " corner " in the stock of the 
Stutz Motors Company, the Board of Governors of the 
New York Stock Exchange refused to permit further trans- 
actions in this security on the Exchange. Mr. Ryan 
claimed that certain interests sought to depress the stock 
in order to damage the company and that he merely stepped 
in to prevent this. Such operations, however, always make 
a bad impression upon the public, especially where they 
are undertaken by and on behalf of the company itself as 
in the case of a very large company, which from 1903 

1^ See Ripley, Trusts, Pools and Corporations. 

16 See Dewing, Corporate Promotions and Reorganizations. 

I'' See Commercial & Financial Chronicle, Sept, 1896. 



ABUSES AND WEAKNESSES 427 

to 1908, was accused of having actually bought and sold its 
own stocks on margin. 

5. Unfair Competition. — We have seen how the great 
combinations and monopolistic enterprises are in a posi- 
tion to effect economies through efficiency in the technique 
of production, in procuring their raw materials and in mar- 
keting their finished products. They combined not 
primaril}^ to secure the advantages of large scale produc- 
tion for themselves and the consumer, but sought rather 
to acquire a monopolistic command over the industry in 
which they operated. Most of them have failed to attain 
their goal. Some were checked through the application of 
the anti-trust laws and others met with insurmountable 
practical difficulties. The only advantages over competitors 
that they enjoyed were chiefly those inherent in large scale 
production, but these were also attainable by their smaller 
competitors. Great size, huge fixed charges and burden- 
some administrative expenses bore heavily upon them. 
Under these conditions, the benfits that combination gave 
them at the outset were rapidly being swallowed up by 
the greater costs of doing business. They soon began to 
fear their competitors and resorted to many questionable 
business practices to suppress them. Many of these big 
concerns were repeatedly hauled before the courts to 
answer charges of unfair competition that were launched 
against them, and were usually found guilty. In fact, so 
general did this practice become that congress, in 1914, 
gave specific attention to this problem in the Clayton Act, 
supplementing the anti-trust legislation, and in the act 
creating the Federal Trade Commission. A number of 
the states also have adopted similar protective legislation 
enforceable through fines and imprisonment. 

What constitutes unfair methods of competition, such 
as are contemplated by these acts, has become fairly well 
established through court decisions. An analysis of these 



428 OWNERSHIP ORGANIZATION ABUSES 

decisions has made it possible to classify them by types 
such as those given below .^^ While this is by no means a 
complete list, it will, nevertheless, serve to illustrate in a 
general way some of the unfair practices that have been ex- 
tensively employed by our larger business concerns to en- 
trench and maintain themselves in a commanding position 
in their respective industries. 

(a) Local price cutting stands at the head of the list. 
It has been used effectively by concerns that have a mar- 
ket which extends over a wide geographic area. They can 
cut the price at one point and recoup their losses by slightly 
raising it at other points, and thus crush their competitors 
one after another. It appears at one time to have been 
the favorite practice with the Standard Oil Company and 
with E. I. du Pont de Nemours and Company, the so-called 
Powder Trust. 

(6) Bogus Competing concerns in the form of owned or 
controlled companies have also played their part. They 
are easily established and operated through the holding 
company organizations. The American Tobacco Company, 
the Powder Trust, the National Cash Register Company, 
used them to break down competition, and it was one of 
the few illegal practices indulged in by the conservative 
International Harvester Company. 

(c) Fighting instruments is a term used to designate a 
product or appliance that is sold or operated at a loss for 
the definite purpose of breaking down a competitors' busi- 
ness. The American Tobacco Company used its " Battle 
Ax Plug " in this way, the Eastman Kodak Company a 
certain photographic print paper, the Waltham Watch 
Company one of its cheap watches, and even the big ocean 

18 Dr. W. H. S. Stevens in a little book entitled " Unfair Com- 
petition " has worked out an excellent classification and descrip- 
tion of these practices from court decisions upon which the one 
here given is largely based. Case references may be found in this 
work. 



ABUSES AND WEAKNESSES 429 

and river transportation companies maintained vessels 
which could be put into service to prevent the establish- 
ment of independent competing lines. 

(d) Exclusive and restraining contracts, similar to those 
described as factors' agreements, also are unfair practices. 
They lead to a great deal of legislation because they are 
so frequently used in conjunction with patented 
commodities. 

(e) Rebates and preferential contracts have been ex- 
tremely common, and are used either individually or 
jointly. A fine of $29,000,000 was at one time imposed by 
a Federal District Court upon the Standard Oil Company 
for accepting rebates from a railway company, but the 
decision was subsequently reversed. Nevertheless, this was 
one of the favorite illegal practices that led to the passage 
of railway rate and anti-trust legislation, and it was quite 
common prior to 1890 and still crops up occasionally in 
modified form. 

(/) Exclusive control of machinery used in manufactur- 
ing processes, frequently called engrossing, has also been 
charged against some of our big business establishments. 
It is secured either through contracts requiring the manu- 
facturer of the equipment to sell his whole output to the 
controlling concern, or through control of the patents giv- 
ing the exclusive right to manufacture. The American 
Can Company, the Eastman Kodak Company and the 
Standard Envelope Company are reported to have pre- 
vented competition from springing up by this means. 

ig) Black listing and boycotting have been very popular 
among lumber dealers who sought in this way to prevent 
price cutters from securing a supply of lumber. They have 
also been common in other fields of enterprise and have 
resulted in many prosecutions. 

{h) Intimidation and interference were among the 
methods employed by the National Cash Register Com- 



430 OWNERSHIP ORGANIZATION ABUSES 

pany, the Shredded Wheat Company and others. Threats 
to cut off the supply of commodities to dealers, under- 
mining the morale of competitors in order to induce them 
to sell out, fomenting strikes in the plants of competitors 
and hounding them with lawsuits, are some of the prac- 
tices that come in this class. 

(i) Manipulation of the markets has been indulged in, in 
order to force down the price of raw materials and to force 
up the price of finished products. The packers have been 
charged with inducing shippers of live stock to send their 
stock to yards that were already over-supplied. The 
butter producers of the middle West used " wash " sales to 
cover their price manipulations. 

6. Monopoly and Combinations in Restraint of Trade. — 
The monopoly problem is subject matter for a course in 
itself. It is a problem that is constantly before the busi- 
ness public and one of prime importance. It is the anath- 
ema of American business. But after all, it is merely a 
matter of degree of industrial or commercial control, and the 
problems that it presents are chiefly those that have already 
been discussed, but in a somewhat more intensified form. 

The growth and development of monopolies follows in 
general the same methods that lead to the development 
of large scale enterprises and combinations. They present 
no new features of organization but only a question of 
policy. While it is one of the cardinal rules of English, as 
well as American common law, that a state of free compe- 
tition is the ideal state, this point of view is by no means 
universal. In Germany and other European countries, 
monopolies have been accorded legal sanction and exist in 
large numbers, more or less under government control and 
supervision. Even in America, the attitude toward them, 
influenced as it is by the forces of economic development, 
has undergone a gradual change from absolute condemna- 
tion to one of discrimination between " good " and " bad " 



ABUSES AND WEAKNESSES 431 

trusts, and the application of the " rule of reason " by the 
courts in interpreting the anti-monopoly acts. However, 
this problem is not one that falls properly within the scope 
of this work. 

The many evils of our system of business organization, 
its weaknesses, the malfeasances and manipulations that 
have here been discussed cannot but leave an unfavorable 
impression. To one who comes into constant contact with 
this dark side of American business life the picture is in- 
deed depressing. It is this aspect of business that has 
led Mr. Samuel Untermeyer, who has acted as attorney for 
many investigating committees and has prosecuted many 
charges of violation of the law against big business con- 
cerns and their managers to characterize our corporation 
system in the following words: ^^ " Our corporation laws 
are without exception the loosest, most unjust and inade- 
quate, and in every way the worst with which any civilized 
nation is afflicted. They are a snare to the investor, 
minorities are helpless, they offer a premium upon dishon- 
esty and furnish the safest and most fruitful field to the 
criminally disposed exploiter for the practice of fraud and 
oppression upon the public. Every safeguard that other 
countries have thrown about their citizens has been re- 
jected by us. From the birth to the death of the corpora- 
tion the system is utterly wrong and designedly so." 

This is surely a pessimistic view, and it is not without 
some foundation. The evils have been recognized. They 
have for years been well known. Remedies have frequently 
been proposed, but these have usually failed because of 
lack of interest and insufficient support on the part of the 
general public. Nevertheless, laudable efforts have at 
times been made through the passage of remedial legisla- 
tion to correct these evils and abuses. These will be briefly 
considered in the closing chapter. 

19 From an address appearing some years ago in the Lawyer 
Citizen. 



CHAPTER XXI 

PRESENT AND PROPOSED REGULATION AND REFORM 

From the preceding chapters, we have seen that there 
are at present many regulatory measures in the statutes of 
our states and of the federal government. Nevertheless, in 
spite of these many statutes the situation is not encouraging. 
Many of the state laws are poorly enforced, and the 
federal laws are confined largely to matters of interstate 
commerce. Before considering what should be done to 
suppress the many evils and abuses of the system, it is 
well to review briefly some of these state and federal laws. 

State Regulation and Control 

Much has been done by state legislatures and constitu- 
tional conventions for the protection of the public, the 
stockholder and the creditor of the corporation. A few 
states have attacked the problem in a spirit of fairness and 
justice. But in most instances these regulatory measures 
stand as isolated attempts rather than as well conceived 
parts of a complete and orderly system of reform. 

Corporate Control. — The all important problem of cor- 
porate control has received considerable attention. A few 
states have constitutional provisions prescribing voluntary 
or compulsory use of the cumulative system of voting at 
the election of directors, thus seeking to assure a sizeable 
minority of proper representation on the board of directors. 
Many others have provided for the same thing by statute. 
The evil of the long-time proxy has been recognized and 
met by requiring that a proxy is valid only if granted within 

432 



REGULATION AND REFORM 433 

a period of a few months, or a year, before the election at 
which it is to be used. A number of states have even rec- 
ognized the danger of the voting trust as a means of divest- 
ing the stockholders of the proper exercise of their voice 
in the management and direction of the corporation, and 
have limited the life of such trusts to a period of five years. 
But, on the other hand, the majority voting system still 
prevails and in a few states the bondholders are given 
voting power. 

Responsible Management. — To secure responsible man- 
agement by directors most of the states have passed laws 
declaring directors to be liable for all damages resulting 
from wilful acts or culpable negligence. A few have even 
gone as far as to provide for penitentiary and jail sentences 
for directors who are guilty of violations of the law. Special 
attention has been given to the question of the declaration 
of illegal dividends. In practically every state are found 
statutes prohibiting the declaration of dividends that will 
impair the capital of the corporation or that will render 
it insolvent. But very seldom do they go further than that. 
Here and there, we find isolated cases where directors are 
required to reimburse the corporation for illegal dividends, 
and others, where they are made liable for certain debts 
of the corporation incurred during their term of office. 
Nevertheless, the control over the board of directors is left 
largely to by-law provisions, and in some of the states the 
directors still have the power to change the by-laws, thus 
making the rules for the game as they play it. Even the 
restrictions concerning dividends are discounted by the 
courts, who have held that the corporation may keep a 
separate account of income and capital, so that even though 
the capital depreciates, dividends may still be declared if 
there have been earnings. 

Capitalization. — The subject of capitalization also has 
received some attention. Some of the states have attacked 



434 OWNERSHIP ORGANIZATION ABUSES 

excessive watering by prescribing that a certain amount of 
the authorized capital stock must be subscribed and paid 
in before the charter will vest. But these requirements still 
are inadequate, for they range from 10 to 50 per cent of 
the total authorized capital stock. Some attempt has 
also been made to prevent the sale of stock for less than its 
par value, and to require that property and services obtained 
in exchange for stock must, at a fair valuation, be equal to 
the par value of the stock given in exchange. Other states 
have dismissed the whole question of par value by permit- 
ting Ijhe issue of stock without par value. A number of 
state constitutions have provisions affecting the issue of 
bonds, usually requiring that bonds shall be issued for 
real value only, and declaring bonds issued for a fictitious 
value to be void. Many states also have statutory limi- 
tations on the amount of bonds that a corporation may 
issue. In some instances, the maximum bonded indebted- 
ness that may be incurred must be stated in the charter; 
in others it must not exceed the amount of the capital 
stock ; in others it must not exceed 50 per cent thereof, and 
in a few it cannot exceed one half of the value of the 
assets. 

Some attempt has also been made to protect the stock- 
holder against an issue of bonds by the directors. Thus, 
we find in perhaps a dozen states that the consent of 
two-thirds or three-quarters of the stockholders is neces- 
sary to authorize bond issues, and in others there are 
restrictions and limitations on the issue of convertible 
bonds. But in most of the states a mere majority vote 
is sufficient, while in others the directors have power over 
this important matter. 

Systematic Reform. — As before stated, the measures 
described above are more or less isolated instances where 
a single problem has received attention. There have been 
a few attempts by states to effect a general revision of the 



REGULATION AND REFORM 435 

the corporation laws with a view to systematizing their re- 
form measures. This has been the case in Missouri and 
New Hampshire where excellent laws are now in force. 
However, such general reforms are of little avail unless 
they are instituted by all or at least a great majority 
of the states. Under present conditions incorporators avoid 
the states where strict laws prevail and flock to those where 
incorporation is cheap, where the powers granted are broad 
and where there is a minimum of regulation. 

The ** Seven Sisters'* of New Jersey. — In the above 
connection we need but call to attention the experience of 
the state of New Jersey with its corporation reform of 
1913, commonly known as the " Seven Sisters " laws. In 
1908, a commission was appointed to prepare a report on a 
proposed revision of the corporation laws of that state. 
This report sustained the existing system by saying " that 
the prejudice against corporations, common in other com- 
munities, hardly had an existence here ; that the legislature 
did not amend the revised statutes recklessly; and still 
more important, that the courts of this state were conserva- 
tive, reliable and just, in supporting the rights of property, 
and especially learned in the great questions of equity law 
so constantly brought into play in the management of cor- 
porations. Furthermore, the law was not lax in its terms 
nor in its interpretation by the courts. It was liberal, fair 
and sound." But in his message to the New Jersey Legis- 
lature in 1912, Woodrow Wilson, who was then gover- 
nor of that state, attacked these selfsame laws in the fol- 
lowing words: ''The corporation laws of this state are 
notoriously in need of alteration. They are manifestly in- 
consistent with the policy of the people in the all important 
matter of monopoly, to which the attention of the whole 
nation is so earnestly directed. . . . The laws of New 
Jersey as they stand, so far from checking monopoly ac- 
tually encourage it. They explicitly permit every corpora- 



436 OWNERSHIP ORGANIZATION ABUSES 

tion formed in New Jersey, for example, to purchase, hold, 
assign and dispose of as it pleases, the securities of this or 
that corporation and to exercise at pleasure the full rights 
of ownership in them, including the right to vote." 

Accordingly, a set of seven bills was drafted and subse- 
quently passed, comprising chapters 13 to 19, inclusive, of 
the Session Laws of 1913. The first of these chapters was a 
strict anti-trust law. The second applied strict rules to 
the valuation of property exchanged for stock and provided 
also that the stock of another corporation could be pur- 
chased only when the property of that corporation was 
'^ cognate in character and use to the property used, or con- 
templated to be used," by the purchasing corporation in 
the direct conduct of its proper business. The third made 
it unlawful to sell any commodity or render any public 
service at a lower rate in one section of the state than in 
another. The fourth made it a misdemeanor to organize 
or to operate a corporation with intent to use it directly 
or indirectly in restraint of trade or in acquiring or foster- 
ing a monopoly. The fifth struck out the famous clause 
empowering corporations to hold and vote the stock of 
other corporations. The sixth provided that no corpora- 
tions previously or subsequently organized should, with 
certain limited exceptions, such as to provide for employees 
benefit funds, purchase or hold stock, bonds or other securi- 
ties in any other corporation. The seventh provided that 
before any merger of corporations could be made, approval 
must first be obtained in writing from the Board of Public 
Utility Commissioners. 

The effect of these laws was felt immediately. Revenues 
from corporation franchise taxes began to fall off and the 
granting of new charters followed suit. Delaware took the 
place of New Jersey as the home of the American corpora- 
tions. Under these conditions, the first counter attack was 
not long delayed. In 1915, the power of purchasing stock 



REGULATION AND REFORM 437 

and bonds for investment purposes was restored. In 1917, 
the third and sixth of the " Seven Sisters " were disposed of 
by repeal and the second was amended. It was pro- 
vided that any corporation formed under any law of this 
state might purchase stock of any other corporation under 
certain liberal definitions and restrictions. In 1920, the 
fourth of these laws, therefore remaining unaltered, was 
repealed, and additional laws were passed reducing taxes 
and fees of incorporation, providing for the issue of non- 
par value shares and for the evaluation and purchase of 
shares of a dissenting stockholder upon the merger or 
consolidation of two or more corporations. 

Thus, was this laudable attempt at reform engulfed in 
a wave of reaction. It seems a hopeless task for the states 
to effect any lasting improvement in the laws governing 
corporate organization so long as they act individually. 
Only through joint action and the adoption of uniform 
laws can it succeed. Some measure of progress has been 
made in this way, particularly through the adoption of the 
principle of the so-called '' blue sky " laws and the Uniform 
Stock Transfer Act. 

** Blue Sky** Laws. — The general laws passed by the 
states seeking to prevent fraud and misrepresentation in 
respect to securities offered for sale within their jurisdiction 
are called " blue sky " laws. They are more or less alike in 
principle but differ greatly in the procedure prescribed to se- 
cure enforcement. One of the earliest of these laws was 
enacted by the state of Kansas. This law requires that every 
corporation, co-partnership and association, with certain ex- 
ceptions such as banks, trust companies, etc., which sells 
or negotiates for the sale of any stocks, bonds or other 
securities in the state shall pay a small fee and file with 
the bank commissioner: (1) A statement showing in full de- 
tail the plan upon which it proposes to transact business; 
(2) a copy of all contracts, bonds or other instruments 



438 OWNERSHIP ORGANIZATION ABUSES 

which it proposes to make with or sell to its contributors; 
(3) a statement which will show the name and location of 
the investment company; (4) an itemized account of its 
actual financial condition and the amount of its property 
and liabilities; and (5) such other information touching its 
affairs as the bank commissioner may require. The bank 
commissioner is then directed to ascertain whether the 
company is solvent and whether it intends to do business 
in a fair and lawful manner; and, if in his judgment, it 
promises a fair return on the investment he may license 
it to carry on dealings in securities within the state. There- 
after, every investment company thus licensed must file 
an annual report in such a form as may be prescribed by 
the bank commissioner. Severe penalties are imposed for 
violations of the provisions of the act. 

Other laws, such as those of New York, Maryland and a 
large number of other states do not prescribe a licensing 
system but merely empower the attorney-general, or some 
other state official, to investigate, either upon complaint 
or his own initiative: (1) The issuance, sale, promotion, 
negotiation, advertisement or distribution of securities 
where there appears to be a purpose to defraud or to ob- 
tain money or property by means of any false pretense, 
representation or promise; (2) where there is a suspicion 
that fictitious or pretended purchases or sales of securities 
are made or contemplated; and (3) where there is suspicion 
that dealings in securities are fraudulent or in violation of 
the law. If the attorney-general finds that the law has 
been, or is about to be, violated he may apply to the 
supreme court for a restraining injunction, and if this is 
not observed he may proceed with civil or criminal prose- 
cution.^ 

A considerable number of states have laws that regulate 
the purchase and sale of a very limited class of securities. 

1 The Maryland law of 1921 is given in Part VI, pp. 589-592. 



REGULATION AND REFORM 439 

These are patterned after, but are not true " blue sky " 
laws. 

Uniform Stock Transfer Act. — In order to bring uni- 
formity into the rules and regulations governing the trans- 
fer of title to shares of stock a law called the " Uniform 
Stock Transfer Act " was prepared some years ago and 
submitted to the several state legislatures for enactment. 
At the present time about one-third of the states have in- 
corporated it in their statutes. It sets forth in great detail 
rules for delivery, indorsements, title, surrender and trans- 
fer of certificates, and the effect thereon of fraud, duress, 
mistakes, revocation, death or incapacity and lack of law- 
ful consideration. Among the states that have adopted 
this act are Massachusetts, New York, Pennsylvania, Ohio, 
Maryland, Rhode Island and Michigan. 

Federal Legislation 

Federal legislation, in so far as it relates to the owner- 
ship organization in business, is naturally limited in its 
scope. The federal government is one of delegated powers 
only, and any powers of regulation over the business 
ownership organization must be expressly granted to it in 
the constitution of the United States. 

It is specifically authorized to provide and to maintain 
a uniform system of currency, and to regulate commerce 
between the several states and with foreign nations. Under 
the former clause the United States chartered and main- 
tained two United States Banks, the first during the 
period from 1796 to 1816 and the second from 1816 to 
1836. Under the same clause it also provided, in 1862, for 
the formation and operation of the National Banks which 
were superseded by the Federal Reserve Banking System 
in 1911. However, it is under the interstate commerce 
clause that most of the congressional legislation relating 
to ownership organizations in business has been passed. In 



440 OWNERSHIP ORGANIZATION ABUSES 

general, this legislation may be grouped under two heads, 
namely, (1) that which deals primarily with transporta- 
tion and (2) that which seeks to prevent monopoly and to 
preserve competition, commonly known as " anti-trust " 
legislation. 

The Interstate Commerce Commission Act of 1887. — 
This act has to do chiefly with the regulation of railway 
freight and passenger rates and specifically prohibited the 
pooling of aggregate or net earnings. It also provided for 
the appointment by the President of an Interstate Com- 
merce Commission of five members with a term of office of 
six years. The commission, among other things, is author- 
ized to require of each carrier an annual report containing 
detailed information on capitalization, equipment, labor, 
receipts, operating and other expenses and a statement on 
financial operations, including an annual balance-sheet. The 
act as amended, in 1893, also gave the commission com- 
pulsory power of investigation. 

The Elkins Act of 1903. — This was apparently in- 
tended to protect both the public and the railroads against 
the monopolistic industrial combinations which brought 
pressure to bear upon the railroads for preferential treat- 
ment. It specifically made corporations as well as their 
agents liable for violations of the interstate commerce laws, 
whereas the older laws made the agents alone liable. 

The Hepburn Amendment of 1906. — This act extended 
the scope of the interstate commerce laws to express com- 
panies, sleeping-car companies and pipe lines for the trans- 
portation of oil or other commodities, except water and 
gas. It also empowered the commission to prescribe a uni- 
form system of accounts for all railroads engaged in inter- 
state commerce. 

The Transportation Act of 1920. — During the war the 
railroads together with other transportation facilities were 
taken over and operated by the government. After the ces- 



REGULATION AND REFORM 441 

sation of hostilities many suggestions were made and plans 
formulated as to what should be done with the railroads. 
There was a strong sentiment that they should be retained 
by the government, and a plan known as the Plum Plan, 
even proposed that they should be turned over to the em- 
ployees who should guarantee their former owners a definite 
return on their investments. In 1920, two bills were 
introduced into Congress, one by Senator Cummins and the 
other by Representative Esch, each of which was passed, 
respectively by the Senate and the House. As the bills did 
not agree on many points they were referred to a confer- 
ence committee, which thereupon prepared the bill which 
was afterwards approved by both houses and signed by 
the President. This law is now commonly known as the 
" Transportation Act of 1920." In addition to providing 
for regulation, assuring the railroads a return of 6 per cent 
on a fair valuation of their properties for a period of two 
years and establishing a Railroad Wage Board, there are 
certain provisions relating to organization. The Cummins 
Bill provided for the compulsory consolidation of the rail- 
way companies into not less than 20 nor more than 30 
great systems. In the final measure, this compulsory 
feature was eliminated, but the Interstate Commerce Com- 
mission was directed to " prepare and adopt a plan for the 
consolidation of the railway properties of the continental 
United States into a limited number of systems." Compe- 
tition should be preserved as fully as possible and the 
several systems should be so arranged that they could 
compete with one another on about equal terms in the mat- 
ter of cost of transportation, value of property, etc., in order 
that uniform rates might prevail. The Commission is 
now at work on its plan for consolidation, and it is highly 
probable that a law providing for compulsory combination 
will be submitted to Congress in the near future. 

The difficulty experienced in forcing railroads to com- 



442 OWNERSHIP ORGANIZATION ABUSES 

pete coupled with the fact that they render a necessary pub- 
lic service that must, under any circumstances, be maintained 
is certain to force a reorganization that will in no small de- 
gree affect the independence and freedom of private owner- 
ship. The government has, by no means, come to a final de- 
termination as to what the ownership organization in this 
important industry shall be. 

Federal Anti-Trust Legislation. — Contrary to the gen- 
eral impression, anti-trust legislation was first inaugurated 
by several of the states before the federal government took 
up this problem. In Kansas,- Michigan, and North Carolina 
such laws were enacted as early as 1889, and a number of 
other states followed this lead in the following year, at 
which time the famous Sherman Anti-Trust Law was in- 
corporated into the federal statutes. 

The Sherman Anti-Trust Law of 1890. — The nature of 
the conditions which led to the enactment of this law by 
Congress have already been sufficiently indicated and need 
not be repeated here. The law itself is very short and con- 
cise, and its meaning at the time of its passage seemed to 
be quite clear.^ Nevertheless, it has been amended on 
several occasions to correct weaknesses and to clarify cer- 
tain doubtful points. The first section declares " every 
contract, combination in the form of trust or otherwise, or 
conspiracy, in restraint of trade or commerce among the 
several states, or with foreign nations " to be illegal and 
makes anyone who enters into any such contract, combina- 
tion or conspiracy guilty of a misdemeanor punishable by 
fine or imprisonment or both. Section two declares it to be 
a misdemeanor '' to monopolize, or attempt to monopolize, 
or combine or conspire with any other person or persons, 
to monopolize any part of trade or commerce " that might 
fall under the interstate commerce clause. Section three de- 

2 A reprint of this Kansas law is given in Part VI, pp. 588-589. 

3 The act is given in full in Part VI, pp. 586-588. 



REGULATION AND REFORM 443 

fines more clearly just what commerce shall be within the 
scope of the act. Sections four and five provide for the en- 
forcement of the act. Section six provides that any property 
in course of transportation in violation to the act shall be 
subject to forfeiture to the United States. Section seven au- 
thorizes anyone who has sustained injury or damage by 
virtue of a violation of the act to recover '^ three fold the 
damages sustained, and the costs of the suit, including a 
reasonable attorney's fee." The last section defines the word 
" person " or " persons " to include all corporations and 
associations. 

Under this act the federal government waged its war 
against monopolies and combinations in restraint of trade. 
Since its enactment, the courts of the United States from 
the district courts to the Supreme Court, have rendered 
hundreds of decisions. Under it, the Standard Oil 
and Tobacco combines, the Northern Securities Company, 
and a great number of others of like character were dis- 
solved in a desperate attempt to restore a state of free and 
open competition. But it was soon found that the law 
was not comprehensive enough, and it has been amended 
on several occasions. 

The Anti-Trust Amendments to the Wilson Tariff Act 
of 1894. — The question of trusts again came up in Con- 
gress during the hearing on the proposed tariff revision in 
1894, with the result that the Wilson Tariff Act, passed in 
that year carried a provision declaring every " combina- 
tion, conspiracy, trust, agreement or contract made by or 
between two or more persons or corporations either of whom 
is engaged in importing any article from foreign countries 
into the United States " to be illegal when such an act is 
intended to operate in restraint of lawful trade, or free 
competition or to increase the market price of any article 
imported or any manufactures into which the article enters 
or is intended to enter. This law was again amended in 
1913 to correct certain defects. 



444 OWNERSHIP ORGANIZATION ABUSES 

The Federal Trade Commission Act of 1914. — Ex- 
perience with the Sherman Act had shown that one of the 
greatest obstacles standing in the way of its enforcement 
was the absence of any permanent body which might collect 
evidence of violations and then frame plans whereby the 
evils might be corrected. It left the collection of evidence 
in the hands of the Department of Justice, while the decrees 
of dissolution had to be drawn up by the courts. This 
placed an exceptionally heavy burden of responsibility 
upon both of these important divisions of the government. 
The problem received the attention of congress, which, in 
1914, enacted the bill creating the Federal Trade Com- 
mission. 

This act provides for appointment, by the President with 
the advice and consent of the Senate, of five commissioners 
for a term of office of five years, not more than three to be 
of the same political party, The commission is empowered 
to choose its own chairman. The act specifically declares 
" unfair methods of competition " to be unlawful and 
directs the commission to prevent their use, empowering 
it to demand summarily the discontinuance of the prac- 
tices and to bring suit in the circuit courts of the United 
States to force compliance. 

Certain additional powers also granted to the commis- 
sion pertain to all business that falls under the interstate 
commerce clause except that of banks and common carriers. 

These are as follows: 

(a) To gather and compile information, and to investi- 
gate from time to time the organization, business, conduct, 
practices and management of any corporation engaged in 
commerce, except those above excluded. 

(6) To require by general or special orders, corporations 
engaged in commerce to file with the commission in such 
form as the commission may prescribe annual or special, or 
both annual and special, reports or answers in writing to 



REGULATION AND REFORM 445 

specific questions, furnishing to the commission such in- 
formation as it may require as to organization, business, 
conduct, practices, management and relation to other cor- 
porations, partnerships and individuals. The commission 
may require such reports to be made under oath. 

(c) To make investigations, upon its own initiative, of 
the manner in which any decree made by the courts to pre- 
vent and restrain any violation of the anti-trust acts 
is being carried out. The Attorney-General may also call 
upon the commission for the same service. 

(d) Upon the direction of the president or either house 
of congress to investigate and report the facts relating to 
any alleged violations of the anti-trust acts by any cor- 
poration. 

(e) Upon the application of the Attorney-General to 
investigate and make recommendations for the readjust- 
ment of the business of any corporation alleged to be 
violating the anti-trust acts in order that the corporation 
may thereafter maintain its organization, management and 
conduct of business in accordance with law. 

(/) From time to time to make public such portions of 
the information obtained by it, except trade secrets and 
names of customers, as it shall deem expedient or in the pub- 
lic interest; and to make annual and special reports to con- 
gress and to submit therewith recommendations for ad- 
ditional legislation; and to provide for the publication of 
its reports and decisions in such form and manner as may 
be best adapted for public information and use. 

ig) From time to time to classify corporations and to 
make rules and regulations for the purpose of carrying out 
the provisions of the act. 

(h) To investigate, from time to time, trade conditions 
in and with foreign countries where associations, combina- 
tions or practices of manufacturers, merchants, or traders, 
or other conditions may affect the foreign trade of the 



446 OWNERSHIP ORGANIZATION ABUSES 

United States, and to report to congress thereon, with such 
recommendations as it deems advisable. 

Further provisions of the act deal largely with the filing 
of suits and the conduct of trials and hearings. 

The Clayton Act. — At the time that the Federal Trade 
Commission Act was under consideration by Congress, 
ways and means of strengthening the Sherman Act were 
also taken up. The reports of the Pujo Commission on 
the so-called " Money Trust " had brought to light new 
problems of combination that involved the big banking and 
financial interests, and the problem of unfair competition 
had assumed threatening proportions. To meet these old 
and new problems Congress, in 1914, enacted the Clayton 
Bill. 

This law declares it to be unlawful to discriminate in 
price between different purchasers of commodities where 
the article is of the same grade, quality or quantity, or 
to fix prices of patented or unpatented articles, or to use 
discounts or rebates in order to force purchasers or dealers 
not to handle or buy goods of competitors, where the 
effect of such acts is substantially to restrain or lessen 
competition. However, it specifically exempts labor, ag- 
ricultural, or horticultural organizations, formed for the 
purpose of mutual help, and not having capital stock or 
being conducted for profit, from the operation of the anti- 
trust laws. 

It further limits the scope of control that a holding com- 
pany may exercise over its subsidiaries in that it forbids the 
acquisition of the whole or part of the capital stock or share 
of capital of another corporation where the effect may be 
substantially to lessen competition, to restrain commerce 
or to create a monopoly, or where the use of such stock by 
the voting or granting of proxies or otherwise may have the 
same effect. But these two prohibitions do not apply to 
the ownership of stock purely for purposes of investment, 



REGULATION AND REFORM 447 

nor to the formation of subsidiary corporations for the 
carrying out of the lawful purposes of the parent, or to 
common carriers in acquiring feeders for their main lines 
or in acquiring control over non-competing independent 
lines. 

The act also strikes at interlocking directorates in banks, 
banking associations or trust companies of certain limited 
classes, namely, such as are organized under the federal 
banking acts and have deposits, capital, surplus and undi- 
vided profits aggregating more than $5,000,000, and pro- 
hibits a director, officer or employee of a state bank of like 
size from becoming or being such in a federal bank. 

A similar provision against interlocking directorates ap- 
plies to corporations, other than banks and common car- 
riers, whose capital, surplus and undivided profits aggregate 
more than $1,000,000 where the effect would be to eliminate 
competition. 

Misapplication by any president, director, officer or man- 
ager of the funds of any firm, association or corporation 
engaged in commerce as a common carrier is made a 
misdemeanor; and common carriers are also restricted in 
their dealings in securities, supplies or articles with partner- 
ships, firms, associations or corporations in which they have 
officers or directors. 

The act grants the federal courts wide latitude in the 
use of temporary restraining orders and injunctions; and 
provides, furthermore, that the acts of any corporation in 
violation of the anti-trust laws are also the acts of the 
individual directors, officers or agents who authorize, order 
or do the acts. The usual penalty of a fine not to ex- 
ceed $5,000 and imprisonment for not exceeding one year 
or both in the discretion of the court is provided as a means 
of enforcement. 

The Webb Act of 1918. — During the war it was felt 
that that application of the Sherman Law and its amend- 



448 OWNERSHIP ORGANIZATION ABUSES 

ments to goods exported to foreign countries was a great 
obstacle to the development of America's foreign trade. 
This restriction was removed in 1918 by the enactment 
of the Webb Bill by congress. Under this act " goods, 
wares, or merchandise exported, or in the course of being 
exported from the United States or any Territory thereof 
to any foreign nation " do not come under the anti-com- 
bination or monopoly restrictions of the anti-trust laws. 
It specifically permits such combination to be formed under 
the stipulation that it " shall file with the Federal Trade 
Commission a verified statement setting forth the location 
of its offices or places of business and the names and ad- 
dresses of all its officers and of all its stockholders or 
members, and if a corporation, a copy of its certificate or 
articles of incorporation and by-laws, and if unincor- 
porated, a copy of its articles or contract of association," 
and thereafter to make a similar annual report to the com- 
mission. The commission is directed to see to it that these 
export combinations do not sell goods within the country 
or in any other way violate the anti-trust acts. 

Within a few years hundreds of export combinations were 
formed under the act but with the decline in the foreign 
trade of the United States many of them have since ceased 
to function. 

The War Finance Corporation Act. — Under its war 
powers Congress greatly extended its authority and control 
over ownership organizations. The War Finance Corpora- 
tion Act, passed in 1918, sought to accomplish two things. 
First, it created a corporation with a capital of $500,000,000 
for the purpose of extending loans to industries that were 
necessary to the prosecution of the war and to federal 
banks. It might also issue bonds up to 75 per cent of the 
par value of certain government securities that it had 
acquired as security in support of loans. The stock of this 
corporation was all owned by the United States Govern- 



REGULATION AND REFORM 449 

ment. Second, it created a " Capital Issues Committee " 
and provided " that the Committee may, under rules and 
regulations to be prescribed by it from time to time, in- 
vestigate, pass upon, and determine whether it is com- 
patible with the national interest that there should be 
sold or offered for sale or for subscription any issue, or 
any part of any issue, of securities hereafter issued by any 
person, firm, corporation, or association, the total or ag- 
gregate par or face value of which issue and any other 
securities issued by the same person, firm, corporation, or 
association since the passage of this Act is in excess of 
$100,000." Shares of no par value were to be deemed to 
have a par value of $100 each. Borrowings in the ordinary 
course of business, refunding or renewal of loans, resale of 
certain classes of securities, securities issued by railroads 
and bonds issued by the War Finance Corporation w^re ex- 
empt from the operation of this part of the act. 

The act was to continue in existence for a period of ten 
years, or six months after the end of the war. 

From this act it is at once seen that the federal gov- 
ernment may have much greater power of regulation over 
ownership organizations than it has deemed it wise to ex- 
ercise under normal conditions. But it is open to question 
whether the broad powers of control granted to the Capital 
Issues Committee as a war measure would be equally valid 
under conditions of peace. 

Our Future Policy 

The satisfactory regulation of ownership organizations 
in business in this country is by no means a simple and 
easy problem. It is now generally recognized that our 
system of corporate organization, which constitutes the 
most important element of our ownership system is in great 
need of reform. Nevertheless, there is great difference of 
opinion as to what should be done, or how it should be done 
and who should do it. 



450 OWNERSHIP ORGANIZATION ABUSES 

What Should be Done. — In the first place, it must be 
recognized that five distinct classes have interests at stake 
in this matter, and furthermore, that the interests of these 
classes are more or less opposed. They are the pro- 
moters, the financiers, the stockholders, the creditors and 
the general public. 

The promoters desire little, or no regulation. Complete 
freedom of action is to their advantage. As a rule, they 
are not interested in the success or failure of the venture 
after it has once been established, for their work stops at 
that point. Consequently, the less there is of regulation 
and control the greater is the opportunity in their profes- 
sion. However, the professional promoters are not numer- 
ous nor important as a class and it is very doubtful whether 
they render a really valuable service to modern business. 

The financiers, as we have seen, play an important role, 
not only in the formation and establishment of the modern 
large scale enterprise, but also in its subsequent operation. 
They are undoubtedly a necessary adjunct to the system. 
Their interests must be given full consideration. While 
it would seem that they should desire conservatism, ex- 
perience has proved that they too frequently enter will- 
ingly into agreements to finance highly speculative under- 
takings in the hope of being able to dispose of their transi- 
tory interests in the enterprise to the investing public be- 
fore the collapse comes. They make their largest profits 
out of propositions of this kind, when the underwriting is 
successful. Where it is unsuccessful they lose heavily. 
The history of a number of such failures has become public 
knowledge, with the result that the public, both justly and 
unjustly, has placed the blame on the Wall Street's finan- 
ciers. They are being watched closely by the public at 
large and this, no doubt, .has tended to make them some- 
what more conservative than formerly. Then too, they 
are also heavily interested as stockholders, bondholders 



REGULATION AND REFORM 451 

and ultimate general creditors of the existing enterprises 
which might suffer from new promotions, especially from the 
speculative kind. Thus, on the whole, it would appear 
that the best interests of the financiers lie in a middle 
course, namely moderate regulation. 

. The stockholders, in view of the fact that their interest 
in the enterprise is essentially entrepreneurial in character, 
naturally desire full protection in their right of ownership 
and a full voice in the direction of the business. They hold 
merely an equitable interest in the business, for the claims 
of general and preferred creditors take precedence over 
theirs. Their share in the business decreases directly as 
the creditors' shares increase. It is, thus, no more than 
just that they should insist upon a guarantee of full power 
to decide upon the issuance of mortgage and debenture 
bonds. Furthermore, there is the question of majority and 
minority representation upon the board of directors. The 
ordinary method of voting denies a 49 per cent minority 
even a single place on the board and leaves that minority 
in the position of owners without a voice in the manage- 
ment of the business. The situation becomes still more 
intolerable where the law permits the use of unlimited 
proxies and of long-time voting trusts. We cannot there- 
fore, be surprised at the strong and insistent demand of the 
stockholders for minority representation, assurance of con- 
trol and conservatism in the use of bonds and other credi- 
tors' instrumentalities of organization. 

The creditors' interests demand a sound and conservative 
policy not only in the method of administration but also 
in the formation and organization of business enterprises. 
The extension of credit, in general, is determined by a com- 
plex of the three factors; character, ability and net worth. 
The first two of these factors are essentially characteristics 
or qualities of natural persons, and thus, tend to lose their 
importance in the impersonal forms or organization where 



452 OWNERSHIP ORGANIZATION ABUSES 

those intrusted with policies of control and management are 
constantly subject to change. New stockholders may take 
the place of old and install new directors whose policies are 
unknown. The change may, thus, become detrimental to 
the interests of creditors who extended credit to the enter- 
prise on the strength of the character and ability of those 
who were in control at that time. Because of the uncer- 
tainty of these two factors, the tendency has been to rely 
more upon the capital, or net worth, of the concern as a 
gauge of its right to credit. The creditors' interests de- 
mand that the earnings of the company be retained, or re- 
invested in the business instead of being distributed as 
dividends. In a measure they run counter to those of the 
stockholders, who desire large dividends. Conservatism is 
the chief demand of the creditor, he wants regulations that 
will prevent the quick change in business policy, that will 
prevent the mulcting of the business through large divi- 
dends, that will insure the value of the assets and that will 
prevent over-capitalization. 

The general public's interests should naturally be identi- 
cal with those regulations and conditions that will make it 
possible for industry to develop along the most advanta- 
geous economic lines. But the public does not always know 
what is best, and in making up its mind it appears to be 
perfectly satisfied to let its legislative representatives force 
its demands into a political, rather than an economic 
mold. The apathy of the public in matters concerning the 
mode of formation, methods of finance, of administration 
and control of the business ownership organization is 
astounding. This passive attitude is due, in no small part, 
to the feeling of helplessness that has been engendered by 
the fact that any action seeking to attack the problem at 
its root must emanate from the state governments. These 
seem to be more intent upon deriving a large revenue from 
the sale of corporate charters than upon any constructive 



REGULATION AND REFORM 453 

measures that might prevent the flagrant evils and abuses 
now inherent in the system. 

The evils that are the cause of complaint have been dis- 
cussed. They are more or less clearly understood; and 
the remedy in most cases is as patent as the evil. The con- 
flicting interests, however, remain an obstacle to be 
overcome. 

How it Should be Done. — This is not so much a problem 
of choosing the proper legislative measures whereby the 
evils are to be corrected, but rather one of selecting a mode 
of procedure; that is to say, should it be done through regu- 
latory measures imposed by statute or should the business 
world be left to work out its own salvation. In other 
words, should it be through a policy of government or state 
control or through one of ^' hands off " ? 

The second method has been given a fair trial and has not 
proved to be to the best interests of the public at least in 
so far as the public is a judge of what is to its interests 
and what is not. It may, therefore, be dismissed without 
further consideration. 

Granting, then, that the policy of government control 
should be continued, and perhaps extended, we are at once 
confronted by the question whether the several states or 
the United States should exercise this control. Up to the 
present time it has been very largely in the hands of the 
states, a circumstance that, in no small measure, has been 
responsible for the chaotic conditions that now exist, and 
that will in all probability continue so long as the several 
states follow a policy of competitive laxness and latitude. 

Control by the federal government seems to be the only 
real solution of the problem. This may perhaps be best 
accomplished and made most effective by requiring in- 
corporation under federal laws. This would, of course, not 
give the federal government the powxr of control over the 
personal ownership organizations and unincorporated as- 



454 OWNERSHIP ORGANIZATION ABUSES 

sociations and companies, but it would, nevertheless, be a 
great step in advance. 

Federal Incorporation. — It has at various times been 
suggested that congress, without violating the United 
States Constitution, can force federal incorporation through 
any one or all of the following methods: 

(1) By excluding from the channels of interstate com- 
merce the articles manufactured or otherwise produced by 
state corporations. 

(2) By prohibiting all corporations not chartered by 
congress from engaging in interstate commerce. 

(3) By laying a prohibitive tax upon the interstate 
business transacted by state-chartered corporations. 

(4) By denying the use of the mails to state corpora- 
tions that engage in interstate commerce. 

There is no doubt that the practicability as well as the 
constitutionality of some of these plans are open to ques- 
tion. The first, third and fourth of these plans, all involve 
more or less discrimination and would appear to come 
under the prohibition of the '' due process of law " clauses 
contained in the Fifth and Fourteenth Amendments of the 
Constitution. Thus, it has been held that under these 
clauses the law must operate equally on all persons and that 
any classification adopted must be based upon a reason- 
able ground of distinction. It cannot be a mere arbitrary 
selection.* This would leave the second plan as, perhaps, 
the most feasible. 

Aside from these facts, all of these plans are predicated 
upon the federal government's power to regulate interstate 
conunerce. One of the broadest definitions of interstate 
commerce is that given by Chief Justice Marshall in his 
decision in Gibbons v. Ogden ^ in which he said, " The sub- 

4 Cases in point are: Giozza v. Tiernan (1893), 148 U. S. 657; 
Gulf, etc., Railroad v. Ellis (1897), 165 U. S. 150; McCray v. United 
States (1904), 195 U. S. 27. 
5 9 Wheat. 1, 189 (decided in 1824). 



REGULATION AND REFORM 455 

ject to be regulated is commerce and ... it becomes neces- 
sary to settle the meaning of the word. The counsel of the 
appellee would limit it to buying or selling, or the inter- 
change of commodities. . . . This would restrict a general 
term, applicable to many objects, to one of its significa- 
tions. Commerce undoubtedly is traffic, but it is some- 
thing more — it is intercourse." In further interpretation 
it has been held that it is traffic in or transportation of 
persons, property and ideas.^ But on the other hand, con- 
tracts for the issuance of insurance policies are not inter- 
state commerce.' It is, therefore, doubtful whether the 
interstate commerce clause would be comprehensive enough 
to give the federal government sufficient power adequately 
to control even the more important and larger business 
organizations in the country. 

However, in a special message to congress, January 7, 
1910, in recommending additional legislation to control 
trusts. President Taft said : 

" Generally, in the industrial combinations called ' trusts ' the 
principal business is the sale of goods in many States and in 
foreign markets; in other words, the interstate and foreign 
commerce far exceeds the business done in any one State. This 
fact will justify the Federal Government in granting a Federal 
charter to such a combination to make and sell in interstate and 
foreign commerce the products of useful manufacture under such 
limitation as will secure a compliance with the anti-trust laws. 
It is possible to frame a statute that while it offers protection 
to a Federal company against harmful, vexatious, and unnecessary 
invasion by the States, it shall subject it to reasonable taxation 
and control by the States with respect to its purely local 
business. . . . 

" Corporations organized under this act should be prohibited 
from acquiring and holding stock in other corporations (except 

6 Covington Bndge Co. v. Kentucky (1894), 154 U. S. 204; 
Hanley v. Railroad Co. (1903), 187 U. S. 617, 619; Telegraph Co. v. 
Texas (1881), 105 U. S. 460. 

^ Paul V. Virginia (1868). 3 Wall, 168. 



456 OWNERSHIP ORGANIZATION ABUSES 

for special reasons, upon approval by the proper Federal author- 
ity), thus avoiding the creation under national auspices of the 
holding company with subordinate corporations in different 
States, which has been such an effective agency in the creation 
of the great trusts and monopohes. . . . 

" The drafting of such a Federal incorporation law would offer 
ample opportunity to prevent many manifest evils in corporate 
management to-day, including irresponsibility of control in the 
hands of the few who are not real owners." 

Judge Elbert H. Gary set down his ideas upon this sub- 
ject in a bill drafted by him and submitted to the Senate 
Committee on Interstate Commerce at the request of that 
body.« This bill provides for federal control by requiring 
every corporation, except common carriers, to secure a 
federal license to do interstate business and makes every 
such corporation subject to the regulatory provision of the 
bill so long as it retains such a license. Section 7 of this bill 
seeks to prevent over-capitalization and watered stock by 
requiring as a condition of the issuance of a license that 
" no stock of said corporation was issued except for cash 
or for property equal in value to the par value of the stock 
thus issued." To enable the corporation commission pro- 
vided for in the bill to ascertain the reasonable value of 
property taken in exchange for stock the corporation was 
required to file with the commission a written statement 
signed and sworn to by the majority of the board of direc- 
tors setting forth " (a) A full description of the property 
in payment for which stock was issued; (b) the number of 
shares issued in payment for said property and whether 
or not such shares have a par value, and if so, the aggregate 
par value of the stock so issued, or if not, then the number 
of shares so issued; (c) the names and addresses of the 
vendors of the property purchased or acquired by the cor- 

^ The bill is reprinted in full by W. H. S. Stevens in Industrial 
Combinations and Trusts, pp. 548-557. 



REGULATION AND REFORM 457 

poration with the stock so issued and whether or not they, 
or any of them, were officers or directors of the corpora- 
tion, and whether or not they, or any of them, were, to the 
knowledge of the signers of the statement, owners in their 
own name or otherwise of any shares of stock m the cor- 
poration, and if so, how many of such shares; {d) the 
terms of any agreement, verbal or written, for the transfer 
of such property to the corporation, and the parties to all 
such agreements, and particularly the amount paid as pur- 
chase money in cash or shares for such property, specifying 
any amount payable for good will and any and all amounts 
paid to each vendor; and in case any written contract has 
been made with said vendors, or any of them, a sworn copy 
thereof shall be filed with such statement; (e) in case the 
vendors of such property or any of it, are directors of the 
corporation or owners of any of its stock in their own 
names or otherwise, a statement of the prices paid by them 
for the property so sold or transferred to the corporation 
and copies of all the contracts by which the said vendors 
acquired the ownership or the control thereof." 

It provides further, that all corporations licensed under 
the bill shall make annual and special reports to a cor- 
poration commission, and also gives this commission and 
several other government bodies full power of investigation 
with a view to enforcement of the act. It is by far the 
most comprehensive plan for federal control that has yet 
been proposed short of an amendment of the Constitution. 

However, on summing up the situation, one cannot but 
come to the conclusion that any federal control over busi- 
ness ownership organizations that can be instituted under 
the existing constitutional provisions can be made to apply 
only to a limited number of establishments. The only real 
beginning to a solution of the problem is through amend- 
ment of the Constitution, and this should be given a fair 
trial before the possibility of government control is entirely 
discarded. 



PART VI 

SUPPLEMENTARY FORMS AND 
DOCUMENTS 



A. FORMS PERTAINING TO THE PARTNERSHIP 

FORM 1. 
PARTNERSHIP AGREEMENT 

Articles of Agreement made the sixteenth day of May 
One thousand nine hundred and twenty-one by and between 

John Jones of the City, County and State of New York, 
hereinafter called Jones, 

Thomas Brown of the Town of Montclair, County of Essex, 
State of New Jersey, hereinafter called Brown, and 

Henry Robinson of the City, County and State of New York, 
hereinafter called Robinson, 

Any of whom is hereinafter called " partner " and all of whom 
together are hereinafter called " partners," 

WITNESSETH aS folloWS*. 

1. The said parties above named have agreed to become part- 
ners in business and by these presents do agree to be partners to- 
gether under and by the name or firm of JONES, BROWN & 
ROBINSON, and at the City, County and State of New York 
to engage in and carry on the business of dealers in hardware, 
buying and selhng hardware on their own account or on con- 
signment or commission and generally to do in the scope or con- 
duct of the business whatever ordinarily is done by dealers in 
hardware. 

2. The partnership shall begin on the first day of June, One 
thousand nine hundred and twenty-one. To that end and pur- 
pose they will contribute capital as follows: 

Jones the sum of Ten thousand Dollars ($10,000). 
Brown the sum of Fifteen thousand Dollars ($15,000). 
Robinson the sum of Twenty thousand Dollars ($20,000). 

461 



462 SUPPLEMENTARY FORMS 

Of these contributions fifty per cent (50%) shall be made on 
the day named in this agreement for the partnership herein 
provided for to take effect. The remaining fifty per cent (50%) 
shall be made on the fifteenth day of July, One thousand nine 
hundred and twenty-one. The capital so contributed shall be 
used and employed in common by and between the partners as 
provided in this agreement, and generally for the support and 
management of the partnership business to the mutual benefit 
and advantage of the partners. 

3. All gains, profits and increases that shall come^ grow or 
arise from or by means of the partnership business, and herein- 
after, of whatever nature, in this agreement called " profits " 
shall be divided among the partners in the following manner: 

(a) The profits of the business shall be considered for the 
purpose of computing the division and distribution agreed on 
as of two classes., One class shall be that share of the profits 
to which the partners are entitled irrespective of their contribu- 
tions to capital. This share is designated in this agreement 
as " profits of the first division." The other class shall be that 
share of the profits to which the partners are entitled by reason 
of their contribution of capital to the partnership business. This 
share last described is designated in this agreement as " profits 
of the second division." 

(b) The shares of profits of the first division shall be computed 
as the following percentages of the total profits of the partner- 
ship business: Jones, thirty per cent (30%), Brown twenty per 
cent (20%), Robinson, fifteen per cent (15%). 

(c) Of the remaining thirty-five per cent of the total profits 
of the partnership business comprising " profits of the second 
division " the share of each partner shall be computed, divided 
and distributed in proportion to the amount of capital each 
partner has contributed. 

4. As among the partners losses shall be borne in proportion 
to the capital contributed. Losses shall be paid out of capital, 
but shall be made good out of subsequent profits of the partner- 
ship business before there shall be any accounting for profits 
to the partners. If at any time the capital is entirely exhausted 
in the payment of losses the partners shall be liable as to each 



PARTNERSHir FORMS 463 

other in proportion to the total share of the profits, including 
profits of both divisions to which they are entitled. 

5. Each partner shall be entitled to draw through the year 
Three hundred and fifty Dollars on the last day of each month 
on his personal account and no more, and shall be entitled to 
withdraw this sum so long as this agreement shall continue 
whether or not the business shows a profit. 

6. On the death of any partner the surviving partners shall 
exhibit a statement of accounts as of the date of the deceased 
partner's death to the legal representative of the deceased as 
soon as practicable, but shall not be compelled to make any 
payment or an accounting for a period of eighteen months from 
such decease. The surviving partners may, however, at any time 
pay to such legal representative all or any part of the deceased 
partner's share. So long as any of the capital of the deceased 
partner shall remain in the business his legal representative shall 
be entitled to profits of the second division in proportion to the 
deceased partner's capital remaining in the business. 

7. Representatives of a deceased partner shall not be entitled 
to any compensation or accounting for good-will, but surviving 
partners shall be entitled to the benefit of all the good-will of the 
business as of their own right. Surviving partners shall have a 
right, subiect to and in accordance with the laws of the State of 
New York without compensation, to continue the name of a 
deceased partner as part of a firm name. 

8. It is agreed by and between the parties hereto that there 
shall be kept at all times during the continuance of this agree- 
ment at the office of the partnership perfect, just and true books 
of account wherein the partners shall enter and set down the 
capital contributed and withdrawn, all money by them received, 
paid, laid out and expended in and about the business of the 
partnership, goods, wares and merchandise by them or any of 
them bought or sold, either for the account of the partnership or 
on consignment or commission, and all other matters and things 
whatsoever to the business and the management thereof in any 
wise belonging. Said books shall be used in common among the 
said partners, so that any of them may have access thereto with- 
out any interruption or hindrance of any other. 



464 SUPPLEMENTARY FORMS 

9. The partners once each year, as of the thirty-first of Decem- 
ber, 'and as soon thereafter as reasonably practicable, shall make, 
yield and render each to the other a true, just and perfect in- 
ventory and account of all profits and increases by them or any 
of them made and of ah losses by them or any of them sustained; 
and also all payments, receipts, disbursements, and all other 
things by them made, received, disbursed, acted, done or suffered 
in the partnership and business. When this account is made they 
shall and will clear, adjust, pay and deliver, each to the other, at 
the time, their just share of the profits, and pay and bear their 
just share of the expenses and losses so made as aforesaid. Further 
at the request of any partner such an accounting shall be made as 
of the thirty-first day of any March (March 31st) or the thirtieth 
day of June or September during the continuance of the partner- 
ship hereunder, and as soon thereafter as practicable; but on 
such an accounting no partner shall be entitled to the payment 
of any profits, nor so long as the partnership is solvent shall be 
called on to pay into the partnership his share of the expenses 
and losses. The representatives of a deceased partner, however, 
on calling for such an accounting may, as in this agreement 
above provided, withdraw the proportion of the capital to which 
they are entitled. 

10. At all times during the continuance of their partnership 
the partners and each of them will not engage in any other 
business, but will give their attendance, and will use their 
and each of their best endeavors, and to the utmost of their skill 
and power exert themselves for their joint interest, profit, benefit 
and advantage and will truly employ their joint capital, and, 
until it is paid out on an accounting, the increase thereof, in the 
business aforesaid. No partner shall accept any office or employ- 
ment, whether honorary or remunerative, without consulting the 
other partners or so many of them as may be reasonably avail- 
able, and shall not accept it against the will of half or a majority 
of the partners. 

11. All partners shall have an equal voice in the management 
of the business, but each partner so far as is possible and as is 
reasonable in the interests of the business shall consult the other 
partners. Especially no partner shall commit the partnership 



PARTNERSHIP FORMS 465 

to any transaction on its own account exceeding an amount of 
$2,000 without consulting all the partners who may be reasonably 
available for consultation either personally or by communication 
by mail, telegraph or telephone; and, such opportunity for con- 
sideration as may be consistent with the nature of the transaction 
shall be given. No such transaction shall be entered into unless 
all the partners who are reasonably available are unanimously in 
favor of it. In event of a disagreement among the partners as 
to any other transaction or business the will of the majority, or 
of the majority of those reasonably available for its con- 
sideration, shall prevail, and in the event that the partners 
available are equally divided the transaction shall not be entered 
into or the business undertaken or the change made. 

12. No partner shall on his own account speculate in 
or in any way purchase stocks or other securities or 
commodities on a margin. And the parties hereby also 
mutually covenant and agree to and with each other that during 
the continuance of the partnership none of them shall or will 
indorse any note, or otherwise in any way become - guarantor 
or surety for any person, persons, partnership, association or 
corporation whomsoever or whatsoever. Each partner shall at 
all times duly and punctually pay and discharge his separate 
and private debts and engagements, whether present or future, 
and keep indemnified therefrom, and from all actions, proceedings, 
costs, claims and demands in respect thereof, the partnership 
property and the other partners. 

13. On the termination of this partnership the partners, each 
to the other, shall and will make a true, just and final account 
of all things relating to their business as partners, and in all 
things make a true adjustment in accordance with the terms of 
this agreement. 

In Witness Whereof, the parties hereto have, at the City, 
County and State of New York, hereunto set their hands and 
seals, the day and year first above written. 

In the presence of: 

James Blackman John Jones 

Thomas Brown 
Henry Robinson 



466 SUPPLEMENTARY FORMS 

FORM 2. 

NOTICE OF DISSOLUTION OF PARTNERSHIP 

Notice is hereby given that the partnership subsisting beween 
Adam Jones, Special Partner, Alfred Brown and Henry Miller. 
General Partners, under the firm name of Adam Jones & Com- 
pany was this day dissolved. 

(Dated) (Signatures of Partners) Adam Jones 

Alfred Brown 

Henry Miller 

The notice of dissolution is frequently accompanied by 
an affi'davit by a notary public, such as the following: 

STATE, CITY AND COUNTY OF NEW YORK, SSI 

On this day of 1921, before me personally appeared 

(names of partners), to me known and known to me to be the 
individuals described in and who executed the foregoing instru- 
ment, and they duly acknowledge to me that they executed the 
same. 

Notary Public. 



FORM 3. 

NOTICE OF A PARTNER'S WITHDRAWAL 

Notice is hereby given that on the day of , 

withdrew from the partnership existing between and , 

under the firm name of All debts due to said 

partnership and those due by them have been assumed by the 
remaining partners, who will continue the business under the firm 
name of 

(Dated) (Signatures of Partners) 



SECURITIES-ISSUING ORGANIZATIONS 467 

B. FORMS PERTAINING TO SECURITIES- 
ISSUING ORGANIZATIONS 

1. THE JOINT STOCK COMPANY 

The forms and documents pertaining to the organization 
and operation of the joint stock company are fully as 
numerous and varied as those that pertain to the corpora- 
tion. However, for the most part they resemble the cor- 
porate forms so closely that it would result in a great deal of 
duplication to reproduce them here. For this reason the 
specimens are confined to a single copy of articles of 
association. 

FORM 4. 
ARTICLES OF THE PIERCE FORDYCE OIL ASSOCIATION 

A Joint-Stock Association 

Articles of Copartnership 

Name. 

We, whose names are hereto subscribed, do hereby form a 
Copartnership Association, to be known and styled 

Pierce Fordyce Oil Association, 

which shall continue in existence until the 2d day of April, 1960, 
unless sooner dissolved as herein provided. 

Purposes. 

The general purpose of said Copartnership Association is: To 
engage in the general merchandise of petroleum and the products 
thereof and other such articles as may be advantageously sold or 
handled in connection therewith; to purchase, own and mine lands 
supposed to contain or containing oils or other minerals and to 



468 SUPPLEMENTARY FORMS 

construct and operate refineries or other manufacturing plants 
for refining or reducing such oils or minerals and to engage in 
any other industrial, manufacturing, mining or merchandising 
enterprise or exploitation that may be determined by the board 
of managers appointed or chosen as hereinafter provided. 

Capital. 

The capital is three million dollars, divided into thirty thou- 
sand shares of one hundred dollars each, all of which has been 
paid in, by the subscribers hereto. The capital may be increased 
from time to time by increasing the number of shares and the 
admission of new members, as may be determined by a vote of 
the majority of the then shares at any meeting of the share- 
holders called pursuant to these articles of association or such 
by-laws as may be adopted hereafter by a majority of the shares. 

Shares. 

The certificates of membership shall be issued by the president 
of the board of managers and countersigned by the secretary of 
said board and shall be substantially the following form, viz.: 

Pierce Fordyce Oil Association, 
(Copartnership.) 
Capital, $3,000,000, or thirty thousand shares. 

Member^ s Certificate of Interest. 

This is to certify that is the owner of full 

paid share of beneficial interest in the Pierce Fordyce Oil 
Association, transferable on the books of the association by the 
owner thereof in person or by duly authorized attorney upon 
surrender of this certificate properly indorsed. 

This certificate of interest is subject to the provisions and 
covenants contained in the articles of copartnership of the 
Pierce Fordyce Oil Association, dated the 2d day of April, 1910, 
and any amendment thereto and the by-laws of said association 



SECURITIES-ISSUING ORGANIZATIONS 469 

and the provisions hereof. No member of said association or 
owner or holder of this certificate shall have any authority, power 
or right whatsoever to do or transact any business whatever for, 
on behalf of or binding on the association or any member thereof, 
and no member of this association shall be liable for any debts, 
covenants, demands or torts of this association beyond the amount 
of his shares. 

This certificate shall be the sole and only evidence of member- 
ship in said association and shall be surrendered upon the call 
of the board of governors at any time to the association upon the 
payment or tender of payment to the amount of its face or par 
value and a premium of fifteen per cent thereof. 

In WITNESS WHEREOF, the said association has caused 
this certificate to be signed by its duly authorized officers and to 

be sealed with the seal of the association this day of , 

19 



Secretary. President. 

Death of Member 

The decease or insolvency of a member of the association shall 
not work a dissolution of it or have any effect upon the same, 
its operation or mode of business; nor shall it entitle his legal 
representatives or heirs or assigns, voluntary or involuntary, to 
any account or to take any action in law or equity or otherwise 
against the association, its members, officers, board of governors, 
trustees or its property or assets; but they shall simply and 
only succeed to the right of the deceased, to the certificate of 
membership and the shares it represents, subject to this agree- 
ment, the amendments thereto and the by-laws of the association, 
now or hereafter adopted. 

Board of Governors 

The entire affairs of this association shall be managed by a 
board of governors, consisting of seven members, each of whom 
shall own at least a certificate or certificates for not less than 



470 SUPPLEMENTARY FORMS 

ten shares, who shall be elected by a majority of shares held by 
members at a regular annual meeting of the certificate holders 
every two years after the expiration of the term of the first 
board of governors. 

The first board of governors shall be composed of the following 
named persons, viz : H. C. Pierce, Samuel W. Fordyce, Samuel W. 
Fordyce, Jr., George T. Priest, Robert E. Moloney, Henry W. 
Allen, and John H. HoUiday, who shall continue for the period 
of five years next ensuing the date of this agreement. 

Each board shall elect its own president, vice-president, secre- 
tary and treasurer and may create such other offices, filling them 
by appointments and prescribing the duties appertaining thereto 
as they may deem wise, necessary or convenient to carry on the 
business of the association and maj^ likewise fill any vacancy in 
its membership occasioned by death or resignation until the next 
election of a board of governors. The board may also fix the 
salaries of all officers, including its own members, and may re- 
move any officer and fill all vacancies which may occur in any 
office. 

The first board of governors shall appoint such a number of 
its members as it may deem proper, not exceeding three, as 
trustees, in whose name or names all investments and title to all 
property are to be made and held under a declaration of trust 
for and on behalf of this association. 

The board of governors shall be held to be trustees for and on 
behalf of this association, and may in that capacity sue and be 
sued in any court of law or equity. 

The board of governors shall have full power and authority in 
the conduct of the business of the association to borrow money 
and issue mortgage debentures therefor if deemed advisable, 
and any debt for money so borrowed or liability created shall be 
and remain until paid a lien upon all funds, moneys and 
properties there or thereafter belonging to or held in trust for 
this association in preference to the claims or claim of any 
shareholder as such. 

(1) The board of governors shall have no power to bind 
the shareholders or members personally; and in every written 
contract or undertaking they shall enter into relating to the 



SECURITIES-ISSUING ORGANIZATIONS 471 

business of this association, its property or any part thereof/ 
reference shall be made to this agreement; and the person, firm 
or corporation so contracting with the board of governors shall 
look only to the funds and property, legal and equitable, of this 
association for the payment of any debt, damage, judgment or 
decree or of any money that may become due and payable in 
any way by reason of the contract or undertaking; and neither 
the board of governors nor the shareholders or members present 
or future shall be personally liable therefor or for any debt in- 
curred or engagement or contract made by said board of 
governors. 

(2) The board of governors may fix and regulate their own 
time and place of meeting and a majority thereof shall con- 
stitute a quorum and possess and exercise all the powers of a 
full board. 

(3) The board of governors shall, whenever they may be so 
minded, convene all the registered share or certificate holders in 
general meeting without specifying the purpose thereof upon 
notice to that effect deposited in the post office at the place of 
the general offices of the association addressed to each share- 
holder at his registered post office address, ten days before the 
date of the proposed meeting; and the majority of the shares 
present or represented at any such meeting so called, shall have 
and exercise the right, power and authority of the entire body 
of share or certificate holders. 

(4) The share or certificate holders shall meet annually on 
the second Tuesday of each year without further notice to con- 
sider the affairs of the association and transact such business 
as may then be inaugurated by them or that may be submitted 
for their consideration by the board of governors. At each 
meeting of the share or certificate holders, each member present 
or represented by duly accredited agent or attorney shall be 
entitled to cast as many votes upon any proposition as he may 
have shares of membership interest. 

(5) At any meeting of members, by-laws may be passed 
or amended by a majority of those present or represented; and 
any amendment may be made to this agreement by a vote of 
three-fourths of those present or represented. 



472 SUPPLEMENTARY FORMS 

. (6) The board of governors may from time to time declare 
and paj^ such dividends from the earnings of the association as 
they deem expedient. 

Officers and their Duties 

President and Vice-President 
The president, or in his absence the vice-president, shall sign 
all certificates of membership, preside at all meetings of the 
members of the board of governors and shall do and perform 
and render such acts and services as the board of governors 
shall prescribe and require and shall receive such compensation 
for services as may from time to time be fixed upon by the 
board of governors. 

Secretary 

The secretary shall countersign all certificates of membership 
and shall keep such minutes, records and books as the bo^rd of 
governors may require, attend all meetings of the board of 
governors and render such services as may be imposed upon him. 

Treasurer 

The treasurer shall perform such duties as the board of 
governors may impose upon him. 

Title Trustees 

The members of the board of governors appointed to hold 
the title to all property of the association shall at all times be 
subject to the orders of the board of governors who may at any 
time and for any cause remove any or all of them from office 
and appoint and devolve upon other members of the board of 
governors the duties and functions of the office. In the case of the 
death, resignation or other disability of any such trustee, the 
board of governors may fill the vacancy caused thereby. 

This association shall continue for a period of fifty years from 
the date of the execution hereof unless sooner dissolved by the 
vote of the majority of membership certificates or shares. 



SECURITIES-ISSUING ORGANIZATIONS 473 

IN WITNESS WHEREOF, we have hereunto set our 
respective signatures and attached our several seals this 
the day of April, 19 

Henry C. Pierce, (Seal). 

S. W. FoRDYCE, (Seal). 
Samuel W. Fordyce, Jr., (Seal). 

George T. Priest, (Seal). 

RoBT. E. Moloney, (Seal). 

Henry W. Allen, (Seal). 

John H. Holliday, (Seal) . 



2. THE CORPORATION 

While the forms and documents used in organizing and 
operating the corporation exhibit almost an infinite varia- 
tion, nevertheless, there are many forms that have become 
more or less standardized. In the selection of the forms that 
follow, care has been taken to avoid any peculiar or ex- 
ceptional technical requirements. 

Contract to Form a Corporation. — The contract be- 
tween the incorporators is in the nature of a partnership 
agreement, and the status of the incorporators is that of 
partners until the purposes of the contract are fulfilled. 



FORM 5. 
GENERAL CONTRACT TO FORM A CORPORATION i 

(state of ILLINOIS) 

This agreement made this first day of November, a.d., 1909, 
by and between the undersigned, John Brown, William Burbank, 
Edward Cunningham, and Raymond WilHams, all of the city of 
Chicago and state of Illinois. 

1 From Frank's Science of Organization and Business Develop' 
ment. 



474^ SUPPLEMENTARY FORMS 

Witnesseth, That in consideration of the mutual undertakings 
and agreements of the parties hereto, as hereinafter set forth, and 
in further consideration of the sum of one dollar by each of the 
said parties to the other in hand paid (at the time of the execu- 
tion hereof), the receipt of which is hereby severally acknowl- 
edged, the said parties to this contract hereby agree by and 
among themselves and with each other as follows, to wit: 

First, that a corporation shall be formed by us under the laws 
of lUinois substantially as follows : 

(a) The name thereof to be the Perfect Automobile Company. 

(6) The capital stock of said corporation to be One Hundred 
Thousand ($100,000) Dollars, divided into one thousand (1,000) 
shares of One Hundred ($100.00) Dollars each, said stock to be 
all Common Stock of uniform character and usual form. 

(c) The purpose of said corporation to be substantially for the 
manufacture and sale of automobiles and their parts. 

(d) Said corporation shall have a Board of Directors con- 
sisting of five in number, who shall all be stockholders of record 
at the time of their election. 

(e) The officers of said corporation shall be a President, Vice- 
President, Secretary, Treasurer, and General Manager. 

(/) The location of the principal office to be at Chicago. 

ig) The duration of said corporation to be 99 years. 

Second, we hereby agree with each other, and the one with the 
other, that we will take the number of shares of the capital stock 
of said corporation set opposite our respective names hereunto 
subscribed, and will pay to the commissioners duly appointed by 
the Secretary of State of Ilhnois in that behalf, fifty (50%) per 
cent of the par value of the said shares so subscribed by us re- 
spectively at the time of holding the first meeting of the said 
subscribers to elect a Board of Directors for said corporation; 
and we further agree to pay the balance of our said subscriptions 
whenever called upon so to do by the Board of Directors of 
said corporation after the same shall be formed. 

Third, we further nominate, constitute, and appoint 

as our agent (or attorney), and the agent (or attorney) of the 
said corporation so to be formed, to create or cause to be created 
the said corporation in accordance with the laws of Illinois and 



SECURITIES-ISSUING ORGANIZATIONS 475 

this agreement, and to do and perform all things necessary to 
bring said corporation into legal existence; and we further 
authorize and empower our said agent (or attorney) to draw on 
the funds in the hands of the legally constituted officers or agents 
of said corporation, for the necessary expenses attending such 
incorporation, and we further agree that any and all contracts 
which our said agent (or attorney) may make in such matter 
shall be binding upon said corporation and also upon us jointly 
and severally. 

In witness whereof, we, the undersigned, hereby severally bind 
ourselves, our heirs, executors, and administrators. 



Names 



Addresses 



Shares 



Amount 



Option Agreements. — Option agreements are employed 
when the corporation to be formed is to take over certain 
properties or businesses in order to hold such properties, etc., 
until the corporation can be fully organized and act for 
itself. The agreements are usually executed between the 
Qwners of the properties as vendors and one of the incor- 
porators of their agent or a promoter as vendee. The pay- 
ment made to secure the option is usually forfeited in 
case the option fails. 



476 SUPPLEMENTARY FORMS 

FORM 6 
OPTION ON BUSINESS AND PROPERTY 

An agreement entered into this 18th day of April, 1916, by 
and between the Ellsworth Wagon Company, a corporation duly 
organized under the laws of the State of lUinois, party of the 
first part, and Wilham F. Mead of Chicago, party of the second 
part. 

For and in consideration of the sum of One Dollar paid said 
party of the first part by the party of the second part, receipt 
whereof is hereby acknowledged, and for other goods and valu- 
able considerations, said party of the first part does hereby 
agree to sell to the said party of the second part, as a going 
concern, its entire business, factories and plant for the manu- 
facture and sale of wagons, owned and operated by said party 
of the first part in the city of Chicago, Cook County, State of 
Illinois, including therewith all machinery, tools, and other 
property and appurtenances thereunto belonging, including all 
raw materials, manufactured products on hand, and all contracts 
relating to the purchase and sale of such materials and products; 
and also the good-will of said business and all trade-marks, brands, 
patent rights, hcenses, etc., used therein and controlled by said 
party of the first part; excepting only moneys and bills and 
accounts receivable on hand at the time of sale; all of such 
property to be delivered free and clear from all liens, charges^, 
encumbrances, taxes and assessments. 

The price to be paid for said property shall be an amount 
Ten Thousand Dollars ($10,000) in excess of the actual appraised 
value at the time of purchase, of said real and personal property, 
exclusive of good-will, as above set forth, and such amount shall 
be paid in cash at the time of transfer. 

This option shall expire and be of no further effect on and 
after the 30th day of September, 1916, unless prior thereto said 
party of the second part, or his assigns shall, in writing, notify 
said party of the first part of his or their intention to exercise 
the same, and shall at that time deposit in the First National 



SECURITIES-ISSUING ORGANIZATIONS 477 

Bank of Chicago, Ten Thousand Dollars ($10,000) in cash as a 
guarantee of good faith and to apply upon the purchase of said 
property, and within such event the party of the first part shall 
within sixty days of such notice and deposit, transfer and convey 
said business and property by such deeds, conveyances, and 
assignments and other instruments as may be necessary to vest 
second part assumes no responsibility to purchase said property 
in said party of the second part or his assigns. 

It is further understood and agreed that said party of the 
second part assumes no responsibility to purchase said property 
unless he or his assigns shall elect so to do by written notice and 
deposit in bank as afore provided, and that in case of assign- 
ment of this present instrument by said party of the second part, 
all its provisions shall inure to the benefit of, and run in favor of, 
and be binding upon his assignee or assignees in every respect 
as heretofore upon said party of the second part, and in case of 
such assignment said party of the second part shall be free from 
all liability hereunder. 

In case of disagreement as to terms of this option or as to 
any matters connected with the exercise thereof, each party 
hereunto shall appoint an arbiter and the two so appointed shall 
appoint a third, and the three arbiters so selected shall be em- 
powered to decide finally all matters of disagreement. 

(Here follow the corporate signatures and the signature of the 
party of the second part.) 

Option on Stock. — When a corporation whose stock is 
closely held by but a few persons is to be sold, the option 
is frequently for the purchase of the stock rather than the 
property of the corporation. If the purchase is made 
on behalf of another corporation, the latter must have the 
powder to hold corporate securities. A common form is as 
f ollow^s : 



478 SUPPLEMENTARY FORMS 

FORM 7 
OPTION ON STOCK 

This agreement made this day of 19. ... , 

between of , party of the first part, 

and of , party of the second part, 

witnesseth : 

In consideration of dollars, the receipt whereof is 

hereby acknowledged, the party of the first part hereby agrees to 

sell shares of the capital stock of the 

corporation at dollars per share at any time 

within days from date. 

All dividends or extra dividends declared during said time are 

to go with the stock ; and days' notice of acceptance 

will be given by said party of the second part. 

In witness, etc. 

Subscription Lists. — The incorporators of a proposed 
corporation usually circulate subscription lists to secure 
subscribers to such portion of the stock of the proposed 
corporation as may be required by law. The subscriptions 
may be taken on a single blank or on individual blanks. 



FORM 8. 

SIMPLE SUBSCRIPTION LIST 

The Interstate Chemical Company to be incorporated under 
the laws of New Jersey by Rudolph Johnson, B. M. Squires and 
Frank A. Ross. 

Capital Stock $100,000 Shares $100 each. 

We, the undersigned, hereby severally subscribe for and agree 
to take at their par value the number of shares of the capital 
stock of the Interstate Chemical Company set opposite our re- 



SECURITIES-ISSUING ORGANIZATIONS 479 

spective signatures, said subscriptions to become due as soon as 
said company is organized and to be then payable in cash on 
demand of the Treasurer of the company. 
Newark, New Jersey, 
June 1, 1921. 

names addresses shares amounts 



Subscriptions may be made either revocable or irrevoca- 
ble and subject to acceptance by the corporation when 
formed. They are frequently negotiated with a trustee 
acting for the company as follows : 

FORM 9. 
TRUSTEE'S SUBSCRIPTION LIST 

{Heading same as above.) 

We, the undersigned, hereby agree with as 

trustee for the company, to subscribe, and 

do hereby severally subscribe, for the number of shares of the 
capital stock of said company set opposite our respective signa- 
tures, and agree to pay par value thereof as follows: 

Ten per cent on demand to as Trustee for 

said company, such payment, or so much thereof as may be 
necessary, to be used for the preliminary and incorporating ex- 
penses of said company; thirty per cent to the Treasurer of the 
Company so soon as said company is organized; and sixty per 
cent within ninety days thereafter. 

Corporation Charter. — The charter or certificate of in- 
corporation is a contract between the state and the incor- 
porators by virtue of which the corporation is created and 
its powers are defined. With proper adjustments the form 
here given would be satisfactory for most small corpora- 
tions. 



480 SUPPLEMENTARY FORMS 

FORM 10 
CERTIFICATE OF INCORPORATION 

OF THE 

FIT-WELL CLOTHING CORPORATION 

(State of New York) 

We, the undersigned, all being of full age and two-thirds being 
citizens of the United States and one of us a resident of the 
state of New York, for the purpose of forming a corporation 
under the Business Corporation Law of the State of New York, 
do hereby certify and set forth: 

First — The name of said corporation shall be '* Fit-Well 
Clothing Corporation." 

Second — The purposes for which said corporation is to be 
formed are as follows: 

{a) To conduct and carry on the business of cutting out, 
making, and preparing clothing and wearing apparel of all kinds, 
and of all other articles which may be conveniently or advantage- 
ously handled in connection with the aforesaid business. 

(6) To buy, sell, import, export, and deal in and with woolen, 
cotton, silk, and other textile fabrics, and in any and all other 
materials useful or necessary in the manufacture of clothing or 
wearing apparel. 

(c) To lease, buy, sell, use and hold all such property, real or 
personal, as may be necessary or convenient in connection with 
the said business. 

(d) To do any and all things set forth in this certificate as 
objects, purposes, powers or otherwise, to the same extent and as 
fully as natural persons might do, and in any part of the world. 

Third — The amount of capital stock of said corporation shall 
be Three Hundred Thousand Dollars ($300,000). 

Fourth — The number of shares of which said capital stock 
is to consist shall be Three Thousand (3,000) shares, of the 
par value of One Hundred Dollars ($100) each. 

Of said capital stock One Thousand (1,000) shares, of the par 
value of One Hundred Thousand Dollars ($100,000) shall be 



SECURITIES-ISSUING ORGANIZATIONS 481 

cumulative preferred stock, entitled to an annual dividend of 
seven per cent (7%) from the profits of the corporation, payable 
semi-annually, on the tenth days of January and July in each 
year, before any dividends are paid upon the common stock, and 
to share equally with the common stock in any excess paid in 
any year above seven per cent (7%) to all the stock, and in the 
event of liquidation or dissolution from any cause said preferred 
stock shall be entitled to be paid in full from the assets of the 
corporation before anything is paid to the common stock. The 
holders of such preferred stock shall not be entitled to vote in 
any meeting of the stockholders or election of directors, unless 
the accumulated dividends due and unpaid such preferred stock 
at the time shall equal or exceed seventeen and one-half per cent 
(17^/^%) of the par value of said stock. 

Of said capital stock Two Thousand shares of the par value of 
Two Hundred Thousand Dollars ($200,000) shall be common 
stock of the corporation. 

Fijth — The principal business office of said corporation shall 
be located in the Borough of Manhattan and in the City, County 
and State of New York. 

Sixth — The duration of said corporation shall be perpetual. 

Seventh — The number of directors of said corporation shall 
be five. 

Eighth — The names and post office addresses of the directors 
of said corporation for the first year are as follows: 

(omitted) 

Ninth — The names and post office addresses of the sub- 
scribers to this certificate, and the number of shares which each 
agrees to take in said corporation are as follows: 

Names Addresses Shares 

Juhus Goldstein Broadway, New York City 5 

Max Engels Montclair, New Jersey 5 

William J. Friedman Fifth Ave., New York City 5 

Tenth — At all elections of directors of this corporation each 
stockholder shall be entitled to as many votes as shall equal 
the number of his shares of stock, multiplied by the number of 



482 SUPPLEMENTARY FORMS 

directors to be elected, and he may cast all of such votes for a 
single director or may distribute them among the number to be 
voted for, or any two or more of them, as he may see fit. 

In WITNESS WHEREOF, we have made and signed this 
certificate in duplicate this 9th day of June, one thousand nine 
hundred and twenty-one. 

Julius Goldstein 
Max Engels 
William J. Friedman 



state of new YORK SSI 

County of New York 

Personally appeared before me this 9th day of June, 1921, 
Julius Goldstein, Max Engels, and WiUiam J. Friedman, to me 
personally known to be the persons described in and who exe- 
cuted the foregoing certificate and severally acknowledged that 
they executed the same for the purposes therein set forth. 

(notarial \ 
seal / 

Henry J. Miller, 
Notary Public for 
New York County 

Object or Purpose Clauses. — Attorneys who make a 
specialty of drafting charters for corporations have prepared 
a great number of more or less standardized object or pur- 
pose clauses applicable to many different kinds of enter- 
prises and businesses. These must be prepared with great 
care because the corporation possesses only such powers 
as have been specifically delegated to it, and the courts are 
usually not very liberal in interpreting these powers. They 
must, of course, be consistent with the laws of the state in 
which incorporation is effected. 



SECURITIES-ISSUING ORGANIZATIONS 483 

FORM 11 

AUTOMOBILES 

To purchase, lease, and acquire lands and buildings for use as 
manufactories, warehouses, and offices; to manufacture, buy, sell, 
import, and export vehicles of all kinds propelled by mechanical 
power; engines and appliances for the generation and use of 
steam, electricity, gasolene, or other form of power for propelhng 
carriages, wagons, trucks, cars, and vehicles of every kind and 
description; all parts and portions of such vehicles, engines, and 
machinery, and all things incident to or used in connection with 
the same. 

FORM 12 
DEPARTMENT STORE 

To buy, lease, construct, or otherwise acquire storerooms, 
warehouses, and other buildings; to buy and sell all kinds of 
merchandise; to equip, conduct, and operate a general depart- 
ment store; to establish therein stores for the purchase and sale 
of dry goods, millinery, cloth, and fabrics, gents' furnishing goods 
women's clothing, men's and boy's clothing, hats, boots and 
shoes, furniture, carpets and draperies, drugs and chemicals, 
hardware, china and glassware, silver, jew^elry, pictures, books, 
stationery, photographs and photographers' supphes, perfumery, 
toilet articles, and bicycles. (Enumeration made to cover any 
classes of business desired). 

FORM 13 

HARDWARE MANUFACTURE AND SALE 

(a) To buy, sell, import, export, and generally deal in and 
with all kinds of tools, hardware, and machinery; to estabhsh, 
maintain, and operate shops and factories for the manufacture 
and construction of all kinds of tools, hardware, machines, and 
mechanical construction. 



484 SUPPLEMENTARY FORMS 

(6) To buy, sell, and generally deal in iron, steel, manganese, 
copper, zinc, brass, and other metals, and in any and all articles 
made of or partly consisting of metal, wood, and other materials, 
and to engage in the repair and manufacture of all goods, wares, 
and commodities dealt in by the corporation. 



FORM 14 
GROCERY 

To do a general grocery business, handhng foodstuffs, kitchen, 
dining-room and nursery utensils and supplies of all kinds; to 
manufacture, grow, buy, sell, import, export, and deal in canned 
and preserved foods of all kinds, fruits, vegetables, meats, bever- 
ages, and everything known as or used in or sold with groceries; 
to run eating estabhshments, cafes, restaurants, and to serve 
beverages of all kinds therein; to buy, own, sell, deal in vehicles, 
horses, motors and other conveyances and the accessories thereof 
for delivering groceries and goods; to do any and all things 
necessary and useful to forward the foregoing objects. 



FORM 15 
MINING 

(a) To buy, lease, or otherwise acquire mines, mining rights, 
quarries, and mineral lands of every kind, nature, and descrip- 
tion, and to work, mine, prospect, develop, operate, and promote 
the same; to mine, quarry and excavate copper, gold, silver, 
and other ores and metals and minerals of all descriptions. 

(6) To buy, lease, construct, own, control, operate, and main- 
tain mills, work, and plants for the crushing, sampling, milling, 
smelting, reduction, and concentration of minerals and metal- 
bearing ores, and the extraction therefrom of all kinds of metals 
and mineral products and by-products, on its own account and 
as factor and agent for others. 

(c) To treat, prepare, and manufacture, and to buy, sell, and 



SECURITIES-ISSUING ORGANIZATIONS 485 

generally deal in iron, steel, manganese, coke, copper, lumber, and 
other materials, and all or any articles consisting of or partly 
consisting of metal, wood, or other materials, and any and all 
products and by-products thereof. 



FORM 16 
INVESTMENT BROKERS 

To buy, sell and otherwise acquire, dispose of and deal in 
government, municipal, corporation, association and individual 
bonds, mortgages and debentures of all kinds; also in stocks and 
choses in action of all kinds, in trust receipts, receivers' certifi- 
cates, commercial paper and securities and evidences of indebted- 
ness of all kinds of social, business and governmental organiza- 
tions and of individual persons; to do any and all things 
necessary and useful to forward the purposes herein expressed 
and implied. 

Capital Stock and Special Stock Clauses. — The capital 
stock clause given in Form 10 may be taken as a standard 
for par value stock. When stock of no par value is em- 
ployed the following form is frequently used. 



FORM 17 
CAPITAL STOCK OF NO PAR VALUE 

The number of shares of capital stock that may be issued by 
said corporation is Three Thousand (3,000) shares which shall 
have no nominal or par value. 

In a few states preferred stock that has no stated or par 
value may be used. The following form would provide for 
such stock. 



486 SUPPLEMENTARY FORMS 

FORM 18 
PREFERRED STOCK OF NO PAR VALUE 

The holders of the preferred stock of the corporation shall be 
paid from the surplus profits an annual cumulative dividend of 
Seven Dollars ($7) on each and every share of such stock, before 
any dividend is paid to the holders of the common stock or 
other disposition is made of such profits, but shall not participate 
in any further dividends. 

The preference as to assets and denial of voting power 
may be stated as in Form 10. 

FORM 19 
NON-CUMULATIVE PREFERRED STOCK 

Said preferred stock shall entitle the holders to receive in each 
year a dividend of eight per cent, payable half-yearly, before any 
dividend shall be set apart or paid on such general or common 
stock, and if the net profits in any year shall not be sufficient to 
pay a dividend of eight per cent on said preferred stock, then 
such dividend shall be paid thereon as the net profits of the year 
will suffice to pay. The holders of the preferred stock shall have 
a preference on the assets of the company, but the dividends 
thereon are not to be cumulative, but shall be payable each year 
only out of the profits of that year, and such preferred stock 
and the certificates therefor may be issued by the board of 
directors by resolution. (American Tobacco Companies). 

FORM 20 
REPRESENTATIVE TYPES OF PREFERRED STOCK 

1. The Sherwin-Wilhams Company of Canada, Ltd. has an 
authorized capital stock of $8,000,000, of which $4,000,000 con- 
sists of seven per cent cumulative preferred stock of $100 par 
value, preferred as to assets as well as dividends. 



SECURITIES-ISSUING ORGANIZATIONS 487 

2 The United States Envelope Company, with an authorized 
capital stock of $5,000,000, has $4,000,000 of seven per cent 
cumulative preferred stock of $100 par value with preference as 
to assets as well as dividends and equal voting rights with com- 
mon stock. 

3. The Weyman-Burton Company's preferred stock has prefer- 
ence as to assets as well as to dividends. No prior lien (on the 
property) to the preferred stock can be created without the 
consent of two-thirds in interest of each class of stockholders. 
Both classes have full voting power and are fully paid and non- 
assessable and no personal hability attaches to the holder. 

4. The United Paperboard Company, Inc., has, in addition to 
$12,000,000 authorized common stock, $2,500,000 of six per cent 
non-cumulative preferred stock of $100 par value. It has pref- 
erence as to dividends and assets and is accorded, share for share, 
the same voting power as the common stock. No mortgage can 
be created without the consent of three-fourths of the preferred 
stock outstanding. The preferred stock is also subject to call 
as a whole for redemption at $110 per share after three years 
from date of issue. A sinking fund is also provided for its re- 
demption. (This stock has many of the characteristics of a 
credit rather than an ownership security). 

5. The American Window Glass Company's seven per cent 
cumulative preferred stock of $100 par value has preference as 
to dividends, but not as to assets. 

6. The Autosales Corporation's six per cent non-cumulative 
preferred stock of $50 par value has preference as to dividends 
as well as to assets and is participating, so that any dividends 
declared, after six per cent on preferred and six per cent on 
common, shall be distributed ratably on preferred and common 
shares. The consent of seventy-five per cent of the outstanding 
preferred stock is necessary to mortgage or encumber the prop- 
erty of the corporation. Both classes of stock have equal voting 
power. 

7. The Central Sugar Corporation's seven per cent cumulative 
preferred stock of $100 par value has preference to assets as well 
as dividends and is redeemable at the company's option in whole 
or in part at $115 per share and accrued dividends. It is con- 



488 SUPPLEMENTARY FORMS 

vertible at any time (unless previously called for redemption) at 
the holder's option into common stock, share for share. No 
mortgage can be placed on the property without the consent of 
two-thirds of the outstanding preferred stock. An annual sink- 
ing fund of twenty-five per cent of the net profits is to be 
applied to the retirement of the preferred stock at not exceeding 
$115 and accrued dividends. Both classes have equal voting 
power. 

8. The Columbia Graphophone Manufacturing Company has 
outstanding a seven per cent cumulative non-participating pre- 
ferred stock of $100 par value with preference as to dividends and 
assets. It may be redeemed at $110 and dividends on any divi- 
dend date on two weeks' notice, and when so redeemed it is to be 
cancelled. The company must set aside, each six months, out of 
the net profits one and one-half per cent of the maximum par 
amount of preferred stock theretofore issued, as a sinking fund to 
be used in the purchase or redemption of preferred stock. This 
sinking fund requirement is cumulative. 

Forms of Stock Certificates. — There are many forms 
of the stock certificate, but in their essential characteristics 
they are much alike. The preferred stock certificates prac- 
tically always give on their face the conditions under 
which the preferred stock is held and the right and prefer- 
ences to which the holder is entitled. Where only one class 
of stock is issued, the common stock certificate is usually 
very simple, but if several classes of stock are used the 
preferences of the other classes are frequently set forth on 
the face of the common stock certificate. On the reverse 
side of the certificate is printed an assignment and transfer 
form which is filled in in blank or in the name of the per- 
son to whom the shares are sold by the owner. The follow- 
ing forms illustrate some of these points. 



SECURITIES-ISSUING ORGANIZATIONS 489 



FORM 21 




490 SUPPLEMENTARY EORMS 



FORM 21 b 

(Form op Assignment on the Back of the Pennsvlvania Raoscms 
Company Stock Certificate] 



t;g 









2§ 



is 



K 



//fa^ , the undersignedjor value received^ have bargained, 

soldf assigned y and transferred , and by these presents do 



bargain, sell, assign, and transfer, unto. 



Shares of the Capital Stock of The Pennsylvania 



z « Railroad Company, and do hereby constitute CLnd appoint 

H 



\ 

g true and lawful Attorney,- irrevocable, for and in. 



g 

g '^ name and stead, but to the use of the above-named assignee 

I g to make and execute all necessary acts of assignment and 

\ » transfer of the said stock on the books of the said Company, 

\ and Attorneys one or more to substitute with like full power 
p ^ for the purposes aforesaid, hereby ratifying and confirming 
g 8 all that said Attorney, or his substitute or substitutes shall 

1 « lawfully do by virtue hereof, 

I S ^^ U/iincAA' (U/fteieo^, have hereunto set 

nd and seal, this day 

^ 5 of _ one thousand nine hundred 

« u 

t & and^ 



H H H 

g g 5 Signed, Sealed, and Delivered 



S in presence of 



SECURITIES-ISSUING ORGANIZATIONS 491 

FORM 22 





'Jl 






492 SUPPLEMENTARY FORMS 



FORM 22 h 

(POBM CO* ASSIOHIIXNT ON THE BaCK OF THX UNITED STATES STEEL/COBPOSAnOM 

PxETssBso Stock Cekhficate] 



r X z 

For value Received Jierehy sell, assign , and transfer unto pll 

^ R 
H » 

^ B 

S 2 w 
,„__ Shares 7 3 2 

r § § 

of the Capital Stock represented by the within Certificate « g> 
and do hereby irrevocably constitute and appoint a J § 

Attorney S ^ g 

R <^ 8 

to transfer the said stock on the Books of the within named 2 J ► 
Corporation with full power of substitution in the premises. | g § 

1 n B 

I s S 

Dated r p *© a s 

^ 85 S 

0^3 
In Presence of J J § 



Is 



SECURITIES-ISSUING ORGANIZATIONS 493 

FORM 23 
CERTIFICATE OF COMMON STOCK GIVING TERMS OF 

Number PREFERRED ISSUE Shares 
2506 

URBAN MOTION PICTURE INDUSTRIES^ INC. 

Incorporated Under the Laws of the State of New York. 

Capital Stock, $10,500,000 

Preferred, $3,500,000 — Common, $7,000,000 

Not Valid Unless Countersigned by the Empire Trust Co. 

THIS CERTIFIES THAT is the owner of 

Shares of the Common Capital 

Stock of the Urban Motion Picture Industries, Inc., full 
paid and non-assessable, transferable only on the books of this 
Corporation in person or by Attorney upon surrender 
of this certificate properly endorsed. 

The Preferred Stock shall be entitled to receive 
cumulative dividends at the rate of eight per cent 
per annum, payable semi-annually, and no more, out 
of the earnings of the Corporation, in preference to 
any dividends upon the Common Stock, and such 
stock shall be entitled to be paid in full upon any 
distribution of the assets of the Corporation before any 
distribution of capital shall be made to Common 
Stock, but shall not be entitled to vote at any meeting 
(seal) of the stockholders except as expressly required by 
statute. 

In Witness Whereof, the said Corporation has 
caused this Certificate to be signed by its duly 
authorized officers and its Corporate Seal to be here- 
unto affixed, this day of a.d. 

192.. 



Asst. Secretary or Treasurer. President or Vice-President. 

SHARES $25 EACH 
Empire Trust Company, Transfer Agent 
Countersigned 

By 

Asst. Sec'y. 



494 SUPPLEMENTARY FORMS 



FORM 24 

CERTIFICATE OF COMMON STOCK WITHOUT PAR OR 
NOMINAL VALUE 

New York 
Full Paid and Non-assessable. 

No Shares 

United Motors Corporation. 

Incorporated under the laws of the State of New York. 

Total authorized stock, 1,200,000 shares, all without nominal or 

par value. 

'' Class A," 1,195,000 shares. " Class B," 5,000 shares. 

This certifies that is the owner 

of shares of the " Class A " stock, full paid and non- 
assessable, without nominal or par value, of United Motors Cor- 
poration, transferable in person or by attorney, on the books 
of the corporation, on surrender of this certificate duly indorsed. 

The authorized stock of said corporation consists of 1,195,000 
shares of " Class A " and 5,000 shares of " Class B " stock, all 
without nominal or par value. Only the holders of the "Class B " 
stock are entitled to voting power of said corporation, but the 
holders of " Class A " stock are entitled to all other rights and 
privileges of stockholders in said corporation. This certificate 
is not vahd until countersigned by the transfer agent and 
registered by the registrar. 

Witness the seal of the corporation and the signature of its 
duly authorized officers this day of 19. . . 

Asst. Secretary. Vice-President. 

Registered: 
Bankers Trust Company, Registrar, 

By Asst. Secretary. 

Countersigned: 

Guaranty Trust Co. of New York, 

By Asst. Secretary. 



SECURITIES-ISSUING ORGANIZATIONS 495 

Lost Certificates. — In case a certificate becomes lost the 
transfer agent is notified to stop the transfer of the title 
to the stock, and a notice such as the following is usually- 
inserted in the financial columns of the daily papers. 

FORM 25 
NOTICE OF STOPPAGE OF TRANSFER 

Lost — Certificate No. B. 110042 for 10 shares Northern Pacific 
Railway Co.; certificate No. N-25355 for 10 shares Chesapeake & 
Ohio Railroad; certificate No. A-70519 for 10 shares New York 

Central Railroad; all in the name of lost in 

transit between City Hall Post Office, New York, and the First 
National Bank, Bradentown, Florida. Transfer has been stopped. 
If found kindly notify Atlantic National Bank, 237 Broadway, 
New York. 

In order to have a new certificate issued to replace one 
that has been lost or destroyed a bond of indemnity similar 
to the following is required of the owner. 

FORM 26 

BOND OF INDEMNITY FOR REISSUE OF LOST STOCK 
CERTIFICATE 

The undersigned, George Burton and the Fidelity Surety Com- 
pany, hereby acknowledge ourselves as held and firmly bound 
unto the Motive Power Company of New York in the sum of 
ten thousand dollars ($10,000), for the payment of which to the 
said corporation, its successors and assigns, we jointly and sever- 
ally bind ourselves, our heirs, executors, administrators and 
successors. 

Signed and sealed by us this day of 19 . . . 

The condition of the above obligation is as follows: 

Whereas, The said George Burton is recorded on the transfer 
books of said Motive Power Company of New York as the owner 
of fifty (50) shares of the capital stock of said company, and 



496 SUPPLEMENTARY FORMS 

Whereas, His original certificate of stock No. 3, issued by said 
company, evidencing his ownership of fifty shares of stock has 
been lost, stolen or destroyed, as he has complained to said 
company, and 

Whereas, Upon application of the said George Burton and 
pursuant to a resolution of the board of directors of the said 
Motive Power Company of New York granting the same, a new 
certificate for the said fifty shares has been this day issued to 
said George Burton and numbered 57; 

Now, Therefore, If the said George Burton, his heirs, exec- 
utors and administrators shall now, and at all times hereafter, 
save, defend, keep harmless and indemnify the said Motive Power 
Company of New York, its legal representatives, successors and 
assigns from, against and on account of all demands, claims or 
causes of action arising out of, upon, or connected with said 
certificate No. 3, for said fifty shares of stock in said company, 
or any actual or pretended purchase or assignment thereof, and 
from all costs, expenses and damages that shall or may arise 
therefrom, and shall also surrender and deliver up to said com- 
pany for cancellation the said certificate No. 3 whenever and so 
soon as it may be found, then the obligation shall be void. Other- 
wise in full force and effect. 

George Burton, 

The Fidelity Surety Company. 

By M. A. Allen, General Agent. 

Signed, sealed and delivered in presence of Arthur B. Morgan, 
Joseph Harper. 

Bond Forms. — While bonds are not essential to the 
organization of a corporation, they are, nevertheless, ex- 
tensively employed to procure capital and hence, are im- 
portant elements of capitalization. The following very 
simple forms have been selected to illustrate some of the 
features of the bond touched upon in the text. 



SECURITIES-ISSUING ORGANIZATIONS 497 

FORM 27 
MORTGAGE TO SECURE BONDS, SHORT FORM 

This mortgage made the day of , a.d. 19 .... , 

by the Company, of the city of IndianapoHs, 

county of Marion, state of Indiana, party of the first part, herein- 
after called the mortgagor, unto The Trust 

Company of the city of IndianapoHs, county of Marion, state 
of Indiana, trustee for those holding the obhgation secured by 
this instrument, party of the second part hereinafter called the 
mortgagee. 

Witnesseth, that said mortgagor in consideration of the sum 
of dollars, the receipt of which is hereby acknowl- 
edged, and for the purpose of securing the repayment of said 
sums with interest, as hereinafter provided, and the performance 
of the covenants hereinafter contained, hereby mortgages and 
warrants unto the said mortgagee, assigns or successors, in this 
trust, and their successors, the lands, premises and property 
situated in the city of Indianapolis, county of Marion and state of 
Indiana, described as follows: (here Describe), together with all 
and singular the hereditaments and appurtenances belonging to 
said mortgagor, and situated on the above described premises, 
and all that may hereafter be put thereon or attached thereto 
in any way or form, together with the franchises belonging to 
said mortgagor. 

Provided always, and these presents are upon the express con- 
dition that whereas, the said Company, 

mortgagor, has executed bonds of the denomination of $1,000 
each with coupons for the semi-annual interest thereon at the 
rate of per cent per annum, bearing even date here- 
with, and delivered the same to the mortgagee, the principal 

sum of which said bonds is payable on the day of , a.d. 

19. ., and the interest thereon is payable on the days 

of and in each and every year hereafter until 

the said principal sum shall be paid according to the tenor and 
effect of said bonds and coupon interest notes, and which said 
principal and interest is payable at , if said mortgagor 



498 SUPPLEMENTARY FORMS 

shall pay or cause to be paid said bonds and the interest thereon 
as above provided, and shall keep and perform the covenants 

and agreements herein contained by to be performed, 

then these presents and said bonds shall cease and shall be null 

and void. And the said Company, mortgagor 

for itself, successors and assigns, hereby covenants with said 
mortgagee, its legal representatives and assigns, as follows: 

First. Said mortgagor will pay to said mortgagee, its legal 

representative and assigns, the said sum of dollars with 

interest thereon, at the rate of per cent per annum, 

payable annually, until the full payment of said 

principal sum according to the terms of said bonds aforemen- 
tioned, and will pay interest at the rate of per cent per 

annum, semi-annually, upon all overdue interest or principal from 
the time of its maturity. 

Second. The said mortgagor within forty days after same 
shall become due and payable will pay all taxes and assessments, 
rates and charges, and all labor, mechanics' or other liens of every 
name and nature which shall be levied or imposed upon said 
property, or upon or on account of this mortgage or the in- 
debtedness secured hereby or upon the interest or estate in said 
property represented by this mortgage, whether levied or imposed 
against the said mortgagor or mortgagee, and the mortgagor 
hereby waives any and all claim or right against said mortgagee 

its legal representatives or assigns or successors in 

this trust, to any payments or rebate on or offset against the 
interest or principal of said indebtedness by reason of the pay- 
ment of any of said taxes, assessments, rates, charges or labor 
or mechanics' liens. Provided, however, that if the sum of 
interest due under this mortgage in any one year, plus the taxes 
levied upon or on account of said mortgage in the same year 
shall exceed the rate of interest allowed by law to be stipulated 
therefor, that such excess of taxes shall be paid by said trustee 
and the party of the first part shall in no case be liable therefor. 

Third. That the said mortgagor will keep all destructible 
property described in this mortgage or situated upon the lands 
described in this mortgage insured against loss and damage by 
fire in responsible insurance companies approved by the 



SECURITIES-ISSUING ORGANIZATIONS 499 

mortgagee, to an amount not less than dollars, and 

pay the premiums therefor. All loss in policies for said insurance 

to be payable to said mortgagee, as interest, created by 

this mortgage may appear, and will dehver the said pohcies, as 
soon as issued to said mortgagee. 

Fourth. If said mortgagor makes default in the payment of 
any of the aforesaid taxes, assessments, rates and charges of 
labor, mechanics' or other hens and effect such insurance and the 
sum so paid shall be further hen on the aforesaid premises and 
property under this mortgage, prior and superior to said bonds 
and coupons and payable forthwith, with interest at the rate 
of per cent per annum. 

Fifth. Should default be made in the payment of any instal- 
ment of principal maturing hereon before the whole thereof 
becomes due or of any instalment of interest when the same 
becomes due and payable or of any taxes, assessments, rates and 
charges or of any labor mechanics' or other liens or of any 
premiums for insurance, or any part thereof, when the same are 
payable as above provided, and should the same or any part 
thereof remain unpaid for a period of thirty days, then and from 
thenceforth, the aforesaid principal sum with all arrearages of 
interest, shall at the option of said mortgagee, its legal repre- 
sentatives or assigns, become due and payable therefrom and 
thereafter, although the period above limited for the payment of 
the same shall not then have expired, anything hereinbefore or 
in said bonds contained to the contrary thereof in anywise 
notwithstanding. 

Sixth. All the aforesaid covenants shall run with the land. 

Seventh. That upon default being made in the payment of 
principal or interest thereon, or of any part thereof at the time 
the same becomes due and payable according to the terms hereof, 
the same mortgagee, its legal representative or assigns, are hereby 
authorized and empowered to foreclose this mortgage in any 
court of competent jurisdiction, and any judgment rendered in 
such suit in favor of the plaintiff therein shall include a reason- 
able fee for the attorney of the plaintiff for his services in 
such suit. 



500 SUPPLEMENTARY FORMS 

In Witness Whereof the said mortgagor has hereunto set 
its hand and seal the day and year first above written. 

The Company 

By , 

President. 
(seal) 

Attest : 

Secretary. 

STATE OF INDIANA, COUNTY OF MARION, SS! 

Personally appeared before me, a notary 

public in and for said county and state, the above named 

The Company, by its president, , 

and acknowledged the execution of the above and foregoing 
mortgage. 



Witness my hand and notarial seal this day of . . . 

A.D. 19 

(seal) 

Notary Public. 



SECURITIES-ISSUING ORGANIZATIONS 501 



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SECURITIES-ISSUING ORGANIZATIONS 503 

By-Laws. — The corporate by-laws are the basic rules 
that are laid down by the stockholders to govern the man- 
agement of the administrative affairs of the corporation. In 
small corporations, where practically all of the stockholders 
are also the directors, by-laws are usually reduced to a 
minimum or are dispensed with entirely. However, in 
large corporations they are extremely important because 
they serve as a grant of authority to the directors and offi- 
cers and also, in a measure, set forth their duties and 
obligations. With the exception of special features and 
arrangements, by-laws have become more or less stand- 
ardized, at least in so far as the general topics treated are 
concerned. In this respect the by-laws of the United 
States Steel Corporation may be looked upon as a standard. 



FORM 29 

BY-LAWS OF UNITED STATES STEEL CORPORATION 
AS ON SEPTEMBER 24, 1918 1 

Article I 

STOCKHOLDERS 

Section 1. Annual Meeting. The annual meeting of the stock- 
holders of the Company shall be held annually at the principal 
„ , office of the Company in the State of New Jersey, 

holders* ^^ twelve o'clock noon, on the third Monday in 

Annual April in each year, if not a legal holiday, and if a 

Meeting. j^g^j hohday then on the next succeeding Monday 

not a legal holiday, for the purpose of electing directors, and 
for the transaction of such other business as may be brought 

before the meeting; and the terms of office of the 
Meeting directors of the several classes shall continue until 

the election of their successors at such meeting 
as provided in Article II. hereof. 

1 By courtesy of the United States Steel Corporation. 



504 SUPPLEMENTARY FORMS 

It shall be the duty of the Secretary to cause notice of each 
annual meeting to be pubUshed once in each of the four calendar 
Advertisine weeks next preceding the meeting in at least one 
Notice of newspaper in each of the following places: Jersey 
Meeting. City, N. J., New York, N. Y., Chicago, 111., and 

Pittsburgh, Pa. Nevertheless, a failure to publish such notice, 
or any irregularity in such notice, or in the publication thereof, 
shall not affect the validity of any annual meeting, or of any 
proceedings at any such meeting. 

Section 2. Special Meetings. Special meetings of the stock- 
holders may be held at the principal office of the Company in 
the State of New Jersey, whenever called in writ- 
Special -jjg^ Qj. i^y ^Q^g Y)y a majority of the Board of 

Directors. 

Notice of each special meeting, indicating briefly the object or 
objects thereof, shall by the Secretary be published once in each 
Advertising °^ ^^® ^^^^ calendar weeks next preceeding the 
Notice of meeting, in at least one newspaper in each of the 
Meetings. following places: Jersey City, N. J., New York, 
N. Y., Chicago, 111., and Pittsburgh, Pa. Nevertheless if all the 
stockholders shall waive notice of a special meeting, no notice 
of such meeting shall be required; and whenever all the stock- 
holders shall meet in person or by proxy, such meeting shall 
be vahd for all purposes without call or notice, and at such 
meeting any corporate action may be taken. 

Section 3. Quorum. At any meeting of the stockholders the 
holders of one-third of all of the shares of the capital stock of 
Quorum ^^^ Company, present in person or represented by 

proxy, shall constitute a quorum of the stockholders 
for all purposes, unless the representation of a larger number shall 
be required by law, and, in that case, the representation of the 
number so required, shall constitute a quorum. 

If the holders of the amount of stock necessary to constitute 
a quorum shall fail to attend in person or by proxy at the time 
and place fixed by these by-laws for an annual meeting, or fixed 
by notice as above provided for a special meeting called by the 
directors, a majority in interest of the stockholders present in 
person or by proxy may adjourn, from time to time, without 
notice other than by announcement at the meeting, until holders 



SECURITIES-ISSUING ORGANIZATIONS 505 

of the amount of stock requisite to constitute a quorum shall 
attend. At any such adjourned meeting at which a quorum shall 
be present, any business may be transacted which might have 
been transacted at the meeting as originally notified. 

Section 4. Organization. The Chairman of the Board and 
in his absence, the Chairman of the Finance Committee, and in 

the absence of both, the President, shall call meet- 
Orgamza- jj^gg ^f ^j^g stockholders to order, and shall act as 

chairman of such meetings. The Board of Direc- 
tors or Finance Committee may appoint any stockholder to act 
. as chairman of any meeting in the absence of the 

Chairman of the Board and of the Chairman of the 

Finance Committee and of the President. 

The Secretary of the Company shall act as secretary at all 

meetings of the stockholders: but in the absence of the secre- 

_ ^ tary at any meeting of the stockholders the pre- 

Secretary. •.• re -4. ^ . 

sidmg omcer may appomt any person to act as 

secretary of the meeting. 

Section 5. Voting. At each meeting of the stockholders, 
every stockholder shall be entitled to vote in person, or by proxy 
appointed by instrument in writing, subscribed by 
such stockholder or by his duly authorized attorney, 
and delivered to the inspectors at the meeting; and he shall have 
one vote for each share of stock standing registered in his name 
at the time of the closing of the transfer books for said meeting. 
The votes for directors, and, upon demand of any stockholder, the 
votes upon any question before the meeting, shall be bj^ ballot. 

At each meeting of the stockholders, a full, true and complete 
list, in alphabetical order, of all of the stockholders, entitled 
List of ^^ ^^^^ ^^ ^^^^ meeting, and indicating the number 

Stock- of shares held by each, certified by the Secretary or 

holders. by the Treasurer, shall be furnished. Only the per- 

sons in whose names shares of stock stand on the books of the 
Company at the time of the closing of the transfer books for such 
meeting, as evidenced by the Hst of stockholders so furnished, 
shall be entitled to vote in person or by proxy on the shares so 
standing in their names. 

Prior to any meeting, but subsequent to the time of closing the 
transfer books for such meeting, any proxy may submit his 



506 SUPPLEMENTARY FORMS 

powers of attorney to the Secretary, or to the Treasurer, for 
examination. The certificate of the Secretary, or of the Treas- 
urer, as to the regularity of such powers of attorney, and as to 
the number of shares held by the persons who severally 
and respectively executed such powers of attorney, shall be 
received as prima facie evidence of the number of shares repre- 
sented by the holder of such powers of attorney for the purpose 
of establishing the presence of a quorum at such meeting and 
of organizing the same, and for all other purposes. 

Section 6. Inspectors. At each meeting of the stockholders, 
the polls shall be opened and closed, the proxies and ballots shall 

be received and be taken in charge, and all questions 
^^sp^^^JP touching the quahfication of voters and the validity 

of proxies and the acceptance or rejection of votes, 
shall be decided by three inspectors. Such inspectors shall be 
appointed by the Board of Directors before or at the meeting, 
or, if no such appointment shall have been made, then by the 
presiding officer at the meeting. If for any reason any of the 
inspectors previously appointed shall fail to attend or refuse 
or be unable to serve, inspectors in place of any so failing to 
attend or refusing or unable to attend, shall be appointed in like 
manner. 

Article II 
BOARD OF DIRECTORS 



Directors. 



Section 1. Number, Classification and Term of Office. 

The business and the property of the Company 

shall be managed and controlled by the Board of 
Directors. 

As provided in the certificate of incorporation, the directors 
shall be classified in respect of the time for which they shall 

severally hold office, by dividing them into three 
tio^^ ' classes, each class consisting of one-third of the 

whole number of the Board of Directors. The 
directors of the first class shall be elected for a term of one year; 
the directors of the second class shall be elected for a term of two 
years, and the directors of the third class shall be elected for 



SECURITIES-ISSUING ORGANIZATIONS 50T 

a term of three years. At each annual election, the successors 

to the directors of the class whose term shall 

Terms of expire in that year, shall be elected to hold office 
ed.cli Clfl.ss 

for the term of three years, so that the term of 

office of one class of directors shall expire in each year. 

The number of directors shall be fifteen; but the 
Number of number of directors may be altered from time to 
time by the alteration of these by-laws. 
In case of any increase of the number of directors, the addi- 
tional directors shall be elected by the directors then in office; 
one-third of such additional directors for the unexpired portion 
of the term of one year; one-third for the unexpired portion of 
of the term of two years, and one-third for the unexpired por- 
tion of the term of three years, so that each class of directors 
shall be increased equally. 

Every director shall be a holder of at least one share of 

the capital stock of the Company. Each director 

niust be ^^^^^ serve for the term for which he shall have 

Stock- been elected, and until his successor shall have 

holders. i3ggn duly chosen. 

At all elections of the directors, the polls shall remain open 
for at least one hour, unless every registered owner 

Polls open Qf shares has sooner voted in person or by proxy, 
one hour. , • • i • ■, ^ . . 

or m writmg has waived the statutory provision. 

Section 2. Vacancies. In case of any vacancy in the direc- 
tors of any class through death, resignation, disqualification or 

other cause, the remaining directors, by affirmative 
ya^ncies ^^^^ q£ ^^le majority thereof, may elect a successor 

to hold office for the unexpired portion of the term 
of the director whose place shall be vacant, and until the elec- 
tion of his successor. Such vacancy shall be filled upon and after 
nominations therefor shall have been made by the Finance 
Committee. 

Section 3. Place of Meeting, etc. The directors may hold 
their meetings, and may have an office and keep the books of 

the Company (except as otherwise may be provided 
Place of fQj. i^y i^^^ jjj g^(,jj place or places in the State of 

New Jersey or outside of the State of New Jersey, 
as the Board from time to time may determine. 



508 SUPPLEMENTARY FORMS 

Section 4. Regular Meetings. Regular meetings of the Board 
of Directors shall be held monthly on the last Tuesday of each 
Regular naonth, if not a legal hohday, and if a legal hohday, 

Monthly then on the next succeeding Tuesday not a legal 

Meetings. holiday. No notice shall be required for any such 
regular monthly meeting of the Board. 

Section 5. Special Meetings. Special Meetings of the Board 
of Directors shall be held whenever called by direction of the 
Chairman of the Board, or the Chairman of the 
fecial Finance Committee, or the President, or of one- 

third of the directors for the time being in office. 
The Secretary shall give notice of each special meeting by 
maihng the same at least two days before the meeting, or by 
telegraphing the same at least one day before the 
Notice meeting, to each director; but such notice may be 

waived by any director. Unless otherwise indicated 
in the notice thereof, any and all business may be transacted at a 
special meeting. At any meeting at which a director shall be pres- 
ent, even though without notice, any business may be transacted. 
Section 6. Quorum. Seven Directors shall constitute a 
quorum for the transaction of business; but if at any meeting of 
the Board there be less than a quorum present, a 
* majority of those present may adjourn the meeting 

from time to time. 

The affirmative vote of at least one-third of all the Directors 
for the time being in office shall be necessary for the passage 
of any resolution. 

Section 7. Order of Business. At meetings of the Board of 
Directors business shall be transacted in such order 

Order of ^g from time to time, the Board may determine by 
Business. ' . ' "^ -^ 

resolution. 

At all meetings of the Board of Directors, the Chairman of 

the Board, or in his absence the Chairman of the 

residing Finance Committee, or, in the absence of both of 

these officers, the President shall preside. 

Section 8. Contracts. Inasmuch as the Directors of this 

Company are men of large and diversified business 

interests, and are likely to be connected with other 

corporations with which from time to time this Company must 



SECURITIES-ISSUING ORGANIZATIONS 509 

have business dealings, no contract or other transaction between 
this Company and any other corporation shall be affected by the 
fact that directors of this Company are interested in, or are 
directors or officers of, such other corporation, if, at the meeting 
of the Board, or of the committee of this Company, making, 
authorizing or confirming such contract or transac- 
vo\^^o?°^ tion, there shall be present a quorum of directors 
least seven not so interested; and any director incUvidually 
disinterested j^ay be a party to, or may be interested in, any 
contract or transaction of this company, pro\dded 
that such contract or transaction shall be approved or be ratified 
by the affirmative vote of at least seven directors not so 
interested. 

The Board of Directors in its discretion may submit any con- 
tract or act for approval or ratification at any annual meeting 
- of the stockholders, or at any meeting of the stock- 
by Stock°^ holders called for the purpose of considering any 
holders of such act or contract; and any contract or act that 
Acts or gi-^r^il \jQ approved or be ratified by the vote of the 

holders of a majority of the capital stock of the 
Company which is represented in person or by proxy at such 
meeting (pro\dded that a lawful quorum of stockholders be 
there represented in person or by proxy) shall be valid and as 
binding upon the corporation and upon all the stockholders as 
though it had been approved or ratified by every stockholder of 
the corporation. 

Section 9. Compensation of Directors. For his attendance 
Comnensa- ^^ ^^-' meeting of the Board of Directors, or 
tion of Finance Committee, every director shall receive an 

Directors. allowance of One hundred dollars for attendance 
at each meeting. 

Section 10. Election of Officers and Committees. At the 
first regular meeting of the Board of Directors in each year (at 
Election of ^^'hich a quorum shall be present) held next after 
Officers and the annual meeting, the Board of Directors shall 
Committees, proceed to the election of the executive officers of 
the Company, and of the Finance Committee to be elected by the 
Board of Directors under the provisions of Article III. and 
Article IV. of the Bv-Laws. 



510 SUPPLEMENTARY FORMS 

Article III 
FINANCE COMMITTEE 

Section 1. The Board of Directors shall elect from the Direc- 
tors a Finance Committee, and shall designate for such com- 
mittee a chairman, who shall continue to be chair- 
Finance jj^^j^ Qf ^jjg committee during the pleasure of the 
Board of Directors. 
The Board of Directors shall fill vacancies in the Finance 
Committee by election from the directors; and at all times it 
shall be the duty of the Board of Directors to keep 
how^mkd' ^^^ membership of such committee full, with due 
regard to the qualifications for such membership 
indicated in this Article of the By-Laws. 
All action by the Finance Committee shall be reported to the 
Board of Directors at its meeting next succeeding 
Committee ^^^^ action, and shall be subject to revision or al- 
to be teration by the Board of Directors; provided, that 
to^Board ^^ rights or acts of third parties shall be affected 
by any such revision or alteration. 
The Finance Committee shall fix its own rules of proceeding, 
and shall meet where and as provided by such rules, or by resolu- 
tion of the Board of Directors, but in every case 
Procedure ^^^ presence of at least four members shall be 
necessary to constitute a quorum. 
In every case the affirmative vote of a majority of all of the 
members of the committee present at the meeting, shall be neces- 
sary to its adoption of any resolution. 

Section 2. The Finance Committee shall consist of six mem- 
bers, besides the Chairman of the Board, who, by virtue of his 

■M-^,^^ u- office, shall be a member of the Finance Committee. 
MemDersnip. ci r • ■, ^ 

bo lar as practicable each of the six elected mem- 
bers of the Finance Committee shall be a person of experience in 
matters of finance. Unless otherwise ordered by the Board of 
Directors, each elected member of the Finance Committee shall 
continue to be a member thereof until the expiration of his term 
of office as a director. 



SECURITIES-ISSUING ORGANIZATIONS 511 

The Finance Committee shall have special charge and con- 
trol of all financial affairs of the Company. The President, the 
Vice-Presidents, the General Counsel, the Treasurer, 

Powers and ^Yie Comptroller and the Secretary, and their re- 
Duties. -^^ 1 11 , 1 1 1 

spective omces shall be under the direct control and 

supervision of the Finance Committee, and of its Chairman when 

the Committee is not in session. 

During the intervals between the meetings of the Board of 
Directors, the Finance Committee shall possess, and may exer- 
cise all the powers of the Board of Directors, in the management 
of all the affairs of the Company, including its purchases of 
property, and the execution of legal instruments with or without 
the corporate seal in such manner as said committee shall deem 
to be best for the interests of the Company, in all cases in which 
the specific directions shall not have been given by the Board of 
Directors. 

During the intervals between the meetings of the Finance 

Conmiittee, and subject to its review, the Chairman of the Board 

and the Chairman of the Finance Committee to- 

Powers of o-ether, shall possess, and may exercise any of the 
Chairmen. '^ r ^, -^^ 4. . \- ^ 

powers 01 the committee, except as irom time to 

time provided by resolution of the Board of Directors. 

Except as otherwise provided by the By-Laws, or 

fixed by ^^ resolution of the Board of Directors, all salaries 

Finance and compensations paid or payable by the Company 

Committee, ^j^^^j ^^ ^^^^^ ^^ ^^i^ Finance Committee. 

No director not an executive officer shall become a salaried 
employee of the Company except by special vote of the Finance 
Committee. 

Article IV 

OFFICERS 

Section 1. Officers. The executive officers of the Company 
shall be a Chairman of the Board of Directors, 

Officers. ^ Chairman of the Finance Committee, a Presi- 

dent, a General Counsel, a Treasurer, a Secretary 

and a Comptroller all of whom shall be elected by the Board 

of Directors. 



512 SUPPLEMENTARY FORMS 

The Board of Directors may appoint such other officers as 
Other they may deem necessary, who shall have such 

Officers. authority and shall perform such duties as from 

time to time may be prescribed by the Board of Directors. 

One person may hold more than one office. 

In its discretion, the Board of Directors by the vote of a 
majority thereof may leave unfilled for any such period as it 
may fix by resolution, any office except those of President, Treas- 
urer, Secretary and Comptroller. 

All officers and agents shall be subject to removal at any 

time by the affirmative vote of a majority of the whole Board of 

Directors. All officers, agents and employees, other 

T^m of ^Yisin officers appointed by the Board of Directors, 

shall hold office at the discretion of the committee 

or of the officer appointing them. 

Each of the salaried officers of the corporation shall devote 
his entire time, skill and energy to the business of the corpora- 
tion, unless the contrary is expressly consented to by the Board 
of Directors or the Finance Committee. No vacation shall be 
taken by any such officers except by consent of the Board of 
Directors or the Finance Committee. 

The Finance Committee shall have power to remove all 
officers, agents and employees of the Company, 
except officers elected or appointed by the Board 
of Directors. 

Section 2. Powers and Duties of the Chairman of the Board. 
The Chairman of the Board of Directors shall be the chief execu- 
Chairman ^^^® officer of the corporation and, subject to the 
Powers and Board of Directors and Finance Committee, shall 
Duties. be in general charge of the affairs of the corpora- 

tion. He shall preside at all meetings of the stockholders and of 
the Board of Directors; and by virtue of his office shall be a 
member of the Finance Committee. 

Section 3. Powers and Duties of the President. In the ab- 
sence of the Chairman of the Board and the Chairman of the 
President Finance Committee, the President shall preside at 
Powers and all meetings of the stockholders and of the Board of 
Duties. Directors. Subject to the Board of Directors and 

the Finance Committee, he shall have general charge of the 



SECURITIES-ISSUING ORGANIZATIONS 513 

business of the corporation relating to manufacturing, mining 
and transportation and general operation. He shall keep the 
Board of Directors and the Finance Committee and the Chair- 
man of the Board and the Chairman of the Finance Committee 
fully informed, and shall freely consult them concerning the 
business of the corporation in his charge. He may sign and 
execute all authorized bonds, contracts, checks or other obhga- 
tions in the name of the corporation, and with the treasurer or 
an assistant treasurer may sign all certificates of the shares in 
the capital stock of the corporation. He shall do and perform 
such other duties as from time to time may be assigned to him 
by the Board of Directors. 

Section 4. Vice-Presidents. The Board of Directors may 
appoint a vice-president or more than one vice-president. Each 
vice-president shall have such powers, and shall 
p^^% t perform such duties, as may be assigned to him 
by the Board of Directors or the Finance Committee. 
Section 5. The General Counsel. The General Counsel shall 
be the chief consulting officer of the Company in all legal mat- 
ters, and subject to the Board of Directors and the 
General Finance Committee, shall have general control of 

all matters of legal import concerning the Company. 
Section 6. Powers and Duties of Treasurer. The Treasurer 
shall have the custody of all the funds and securities of the Com- 
Treasurer P^^Y which may have come into his hands; when 
Powers necessary or proper he shall endorse on behalf of 

and Duties. ^]^g Company, for collection, checks, notes and other 
obligations, and shall deposit the same to the credit of the Com- 
pany in such bank or banks or depositary as the Board of Direc- 
tors or the Finance Committee may designate; he shall sign all 
receipts and vouchers for payments made to the Company; 
jointly with such other officer as may be designated by the 
Finance Committee, he shall sign all checks made by the Com- 
pany, and shall pay out and dispose of the same under the 
direction of the Board or of the Finance Committee; he shall 
sign with the President, or such other person or persons as may 
be designated for the purpose by the Board of Directors or the 
Finance Committee, all bills of exchange and promissory notes 
of the Company; he may sign, with the President or a Vice- 



514 SUPPLEMENTARY FORMS 

President, all certificates of shares in the capital stock; whenever 
required by the Board of Directors or by the Finance Commit- 
tee, he shall render a statement of his cash account; he shall 
enter regularly, in books of the Company to be kept by him 
for the purpose, full and accurate account of all moneys received 
and paid by him on account of the Company; he shall, at all 
reasonable times, exhibit his books and accounts to any direc- 
tor of the Company upon application at the office of the Com- 
pany during business hours; and he shall perform all acts inci- 
dent to the position of treasurer, subject to the control of the 
Board of Directors or of the Finance Committee. 

He shall give a bond for the faithful discharge of his duties 
in such sum as the Board of Directors or the Finance Com- 
mittee may require. 

Section 7. Assistant Treasurers. The Board of Directors 

or the Finance Committee may appoint an assistant treasurer 

or more than one assistant treasurer. Each assist- 

Assistant ^^^ treasurer shall have such powers and shall 

perform such duties as may be assigned to him by 

the Board of Directors, or by the Finance Committee. 

Section 8. Powers and Duties of Secretary. The Secre- 
tary shall keep the minutes of all meetings of the Board of Direc- 
Secretary *°^^' ^^^ *^^ minutes of all meetings of the stock- 
Powers holders, and also (unless otherwise directed by the 
and' Duties. Finance Committee) the minutes of all committees, 
in books provided for that purpose; he shall attend to the giv- 
ing and serving of all notices of the Company; he may sign with 
the president in the name of the Company all contracts authorized 
by the Board of Directors or by the Finance Committee, and, 
when so ordered by the Board of Directors or the Finance Com- 
mittee, he shall affix the seal of the Company thereto; he shall 
have charge of the certificate books, transfer books and stock 
ledgers, and such other books and papers as the Board of Direc- 
tors or the Finance Committee may direct, all of which shall, at 
all reasonable times, be open to the examination of any director, 
upon appHcation at the office of the Company during business 
hours; and he shall in general perform all the duties incident to 
the office of secretary, subject to the control of the Board of 
Directors and of the Finance Committee. The offices of Secre- 



SECURITIES-ISSUING ORGANIZATIONS 515 

tary and of Treasurer may be held by one and the same person. 

Section 9. Assistant Secretaries. The Board of Directors 

or the Finance Committee may appoint one assistant secretary 

or more than one assistant secretary. Each assis- 

Assistant ^^j^^ secretary shall have such powers and shall 

perform such duties as may be assigned to him by 

the Board of Directors or by the Finance Committee. 

Section 10. Comptroller. The Comptroller shall be the prin- 
cipal officer in charge of the accounts of the Company, and shall 
perform such duties as from time to time may 
* be assigned to him by the Board of Directors or 
the Finance Committee. 

Section 11. Voting uipon Stocks. Unless otherwise ordered 
by the Board of Directors or by the Finance Committee, the 
Chairman of the Board or the Chairman of the 
St°ock? ^^^^ Finance Committee shall have full power and 
owned in authority in behalf of the Company to attend 
*other ^^^ iq act and to vote at any meetings of stock- 

holders of any corporation in which the Company 
may hold stock, and at any such meeting shall possess and may 
exercise any and all the rights and powers incident to the owner- 
ship of such stock, and which, as the owner thereof, the Company 
might have possessed and exercised if present. The Board of 
Directors or the Finance Committee, by resolution, from time 
to time, may confer like powers upon any other person or 
persons. 

Article V 

CAPITAL STOCK-SEAL 

Section 1. Certificates of Shares. The certificates for shares 
of the capital stock of the Company shall be in such form, not 
inconsistent with the certificate of incorporation, as 
C^^t'fi t ^^^"^ ^^ prepared or be approved by the Board of 
Directors. The certificates shall be signed by the 
president or a vice-president, and also by the treasurer or an 
assistant treasurer. 

All certificates shall be consecutively numbered. The name 
of the person owning the shares represented thereby, with the 



516 SUPPLEMENTARY FORMS 

number of such shares and the date of issue, shall be entered 
on the Company's books. 

No certificate shall be valid unless it is signed by the president 
or a vice-president, and by the treasurer or an assistant-treasurer. 

All . certificates surrendered to the Company shall be canceled, 
and no new certificate shall be issued until the former certificate 
for the same number of shares of the same class shall have been 
surrendered and canceled. 

Section 2. Transfer oj Shares. Shares in the capital stock 

of the Company shall be transferred only on the books of the 

Company by the holder thereof in person, or by 

Transfer of ^ns attorney, upon surrender and cancellation of 

certificates for a like number of shares. 

Section 3. Regulations. The Board of Directors, and the 

Finance Committee also, shall have power and authority to make 

all such rules and regulations as respectively they 

may deem expedient, concerning the issue, transfer 

and registration of certificates for shares of the capital stock of' 

the Company. 

The Board of Directors or the Finance Committee may ap- 
Transfer point a transfer agent and a registrar of transfers, 
Agent. and may require all stock certificates to bear the 

Registrar.' signature of such transfer agent and of such regis- 
trar of transfers. 

Section 4. Closing of Transfer Books. The stock transfer 
books shall be closed for the meetings of the stockholders, and 
Closing of ^^^ ^^^ payment of dividends, during such periods 
Transfer as from time to time may be fixed by the Board of 

Books. Directors or by the Finance Committee, and dur- 

ing such periods no stock shall be transferable. 

Section 5. Dividends. The Board of Directors may de- 
_ . . clare dividends from the surplus or from the net 

profits of the Corporation. 

The dates for the declaration of dividends upon the preferred 
stock and for the declaration of regular dividends upon the com- 
mon stock shall be the days by these by-laws fixed 
Dedarat^on. ^°^ ^^^ regular monthly meetings of the Board of 
Directors in the months of April, July, October and 
January in each year, on which days the Board of Directors in 



SECURITIES-ISSUING ORGANIZATIONS 517 

its discretion shall declare what, if any, dividends shall be de- 
clared upon the preferred stock and the common stock or either 
of such stocks; but upon any day by these by-laws fixed for a 
regular meeting of the Board of Directors in any month 
or upon any day upon which a special meeting of the Board of 
Directors shall be held in accordance with the provisiottis 
of these by-laws, the Directors may declare an extra dividend 
on the common stock of the Corporation out of the surplus 
or net profits of the Corporation existing at the end of the 
last quarter for which a full dividend upon the preferred stock 
was declared, provided all cumulative dividends upon the 
preferred stock for all previous years shall have been declared 
and shall have become payable, and the accrued quarterly instal- 
ments for the current year shall have been declared and the Cor- 
poration shall have paid such cumulative dividends for previous 
years and such accrued quarterly instalments, or shall have set 
aside from its surplus or net profits a sum sufficient for the pay- 
ment thereof. 

The dividends upon the preferred stock, if declared, sever- 
Pref erred- ^^^^ ^^^ respectively, shall be payable quarterly 
when upon the day preceding the last day of May, of 

payable. August, of November and of February in each 

year. 

The dividends upon the common stock, if declared upon the 
days fixed by these by-laws for the declaration of regular divi- 
Common* dends upon the common stock, severally and 
when respectively, shall be payable quarterly on the day 

payable. preceding the last day of June, of September, of 

December and of March in each year; and if any extra dividends 
shall be declared at any other time, they shall be payable upon 
such date or dates as may be determined by the Board of 
Directors. 

If the date herein appointed for the payment of any dividends 

shall in any year fall upon a legal holiday, then 

z!^^^ the dividends payable upon such date shall be 

paid upon the next preceding day not a legal hohday. 

Section 6. Working Capital. The directors shall not be re- 
quired in January in each year, after reserving over and above 
its capital stock paid in, as a working capital for said corpora- 



518 SUPPLEMENTARY FORMS 

tion, such sum, if any, as shall have been fixed by the stockholders, 
to declare a dividend among its stockholders of the whole of its 

accumulated profits exceeding the amount so re- 
Working served, and pay the same to such stockholders on 

demand; but the Board of Directors may fix a 
sum which may be set aside or reserved, over and above the 
Company's capital paid in, as a working capital for the Com- 
pany, and from time to time they may increase, diminish and 
vary the same in their absolute judgment and discretion. 

Section 7. Corporate Seal. The Board of Directors shall 
provide a suitable seal, containing the name of the Company, 

which seal shall be in charge of the secretary. If 
Corporate ^^^ when so directed by the Board of Directors or 

by the Finance Committee, a duplicate of the seal 
may be kept and be used by the treasurer or by any assistant 
secretary or assistant treasurer. 



Article VI 

AMENDMENTS 

Section 1. The Board of Directors shall have power to 

make, amend and repeal the By-Laws of the Company, by vote 

of a majority of all of the Directors, at any regular 

Amend- qj. gpecjai meeting of the Board, provided that 

ments. .„. . , ' ,, 

notice 01 mtention to make, amend or repeal the 

By-Laws in whole or in part shall have been given at the next 

preceding meeting; or without any such notice, by a vote of 

two-thirds of all the directors. 

Voting Trusts. — The forms necessary for the organiza- 
of a stockholders' voting trust are the trust agreement and 
the voting trustees' certificates. A single specimen of each 
of these is here reproduced. 



SECURITIES-ISSUING ORGANIZATIONS 519 

FORM 30 

VOTING TRUST AGREEMENT i 

We, the Undersigned, stockholders of the Glen Harbor Im- 
provement Company, a corporation duly organized under the 
laws of the State of New York, and having its principal office in 
the City of Yonkers, in the State of New York, do hereby, in 
consideration of the premises and of our mutual undertakings 
as herein set forth, severally agree to transfer and deliver the 
shares of stock held by each of us in said corporation, to Emmett 
M. Brown, William Swift, and Andrew McBride, all of the said 
City of Yonkers, as Voting Trustees hereunder, and mutually 
agree with them and with each other that said Trustees shall hold 
and vote the said stock for the period of five years from the 
date hereof, for the purpose and under the following terms and 
conditions : 

1. All stockholders of the said Company may join in the 
voting trust hereby created, by signing this present agreement 
and transferring, in whole or in part, the shares of stock held by 
them in said Company to the said Trustees, under the conditions 
and for the purposes of this present agreement. 

2. Each stockholder in said Company joining this voting trust 
as afore provided shall become a party thereto from the date on 
which stock owned by such stockholder in said Company shall 
be transferred and dehvered to said Trustees for the purposes 
of this agreement. 

3. The said Trustees shall surrender to the proper officer of 
the said Glen Harbor Improvement Company, for cancellation, 
the certificates for all shares of stock transferred to said Trustees, 
and shall, in place thereof, have certificates of said Company 
issued to themselves as Trustees, and on the face of each said 
Trustees' certificate shall be stated the fact that such certificate 
has been issued pursuant to this agreement. 

4. The said Trustees shall collect and receive all dividends and 

1 From Conyngton, Corporate Organization and Management, 
pp. 606-607. 



520 SUPPLEMENTARY FORMS 

profits accruing to said stock and shall pay over the same to the 
respective owners thereof. 

5. The said Trustees shall issue to each stockholder becoming 
a party thereto one or more transferable Trustees' receipts for 
the number of shares of stock placed by each of said stockholders 
respectively in this voting trust, and when such Trustees' receipts 
are duly transferred to other parties, said Trustees shall recognize 
such other parties as the lawful assigns and successors of the 
original parties hereto, entitled to all of their rights in the 
premises. 

6. The stock held under this agreement shall, except as herein- 
after specially provided, be voted at any meeting of the stock- 
holders of said Company by such of the said Trustees as may be 
present thereat, and said vote shall be cast as in the judgment 
of a majority of the said Trustees present at any such meetings 
may be for the best interest of the stockholders subscribing to 
this agreement. 

7. In all elections of Directors the said stock shall be voted 
for the re-election of the present members of the Board of 
Directors of said Company, or, in the event of death, disability, 
or refusal to serve of any such members, the said stock shall be 
voted for such other person or persons as, in the judgment of 
said Trustees, shall be the most suitable for such office. 

8. This agreement shall terminate five years from the date 
hereof, and upon such termination the said Trustees shall, as 
the outstanding Trustees' receipts are surrendered to them, duly 
indorsed, give over to the said Company the certificates of stock 
held by said Trustees, in pursuance of this agreement, properly 
indorsed, and shall direct the officers of said Company to deliver 
to the respective owners of the said surrendered Trustees' receipts 
certificates for such numbers of shares of stock as may be neces- 
sary to satisfy the requirements of the said surrendered Trustees' 
receipts. 

9. In the event of the death, disability, resignation, or refusal 
to act of any of the Trustees herein named, the remaining Trus- 
tees, or Trustee, shall have power to suitably fill such vacancy 
or vacancies, and the person or persons so appointed shall be 
empowered and authorized to act hereunder in all respects as if 
originally named herein. 



SECURITIES-ISSUING ORGANIZATIONS 521 

10. A duplicate of this agreement shall be filed in the principal 
office of the said Company in Yonkers and shall there be kept for 
the inspection of any Stockholder of the Company, daily, during 
business hours. 

In Testimony Whereof, the parties to this agreement have 
hereunto affixed their hands and seals in the said City of 
Yonkers this 27th day of February, 1917. 

Shares 
Voting Trustees Stockholders Transferred 

Emmett M. Brown (L. S.) James Halsey (L. S.) 50 

William Swift (L. S.) Ernest Jurgens (L. S.) 125 

Andrew McBride (L. S.) Harold M. Gilsey (L. S.) 75 

Willis M. Ames (L. S.) 75 



FORM 31 

VOTING TRUSTEES' CERTIFICATE 

Organized Under the Laws of the State of New York 

Number Shares 

CoNsoLmATED Clothing Company 
Capital Stock $500,000 

Certificate for Stock Deposited Under Voting Trust 
Agreement of June 8, 1921. 

H. B. Smith, Max Engels, and William J. Friedman, Trustees, 
by the Trust Company, their agent, having re- 
ceived on deposit the entire capital stock of the Consolidated 
Clothing Company, full-paid and non-assessable, all being held 
under the above-named agreements, to the terms of which the 
holder hereof assents by receiving this certificate, certify that 
is entitled, subject to the provisions of said Agree- 
ment, to Fifty Shares of the stock deposited thereunder. This 
certificate entitles the holder to all rights, dividends and privi- 
leges belonging to the actual stock, excepting only the right to 



522 SUPPLEMENTARY FORMS 

vote. The Trusteeship herein agreed to may be terminated after 
three years upon the terms set forth in the above named agree- 
ment and is ended by hmitation in five years from date of agree- 
ment. 

Transferable only on the books of the undersigned at the 

office of the Trust Company, New York City, by 

the holder hereof in person or by duly authorized attorney, 
upon surrender of this certificate properly indorsed. 

(Dated) H. B. Smith 

Max Engels 
William J. Friedman, 
Trustees 

By Trust Company, 

Depositary and Agent, 
By A. 0. Henry, Secretary. 

The assignment on the back of the certificate should read 
about as follows: 

For value received, I hereby sell, assign, and transfer to 
the interest in the stock of the ConsoHdated Cloth- 
ing Company represented by the within certificate, and do hereby 

irrevocably constitute and appoint my attorney to 

transfer the said interest on the books of the within named 
Trustees with full power of substitution in the premises. 

(Date) (Signature) 



Meetings of Stockholders and Directors. — It is import- 
ant that there be no irregularity in the way in which 
meetings of stockholders or directors have been called and 
notified, otherwise the action taken at such meetings may- 
be held to be invalid and not binding upon the corporation. 
The ordinary rule is that the stockholders and directors 
must be notified of any meeting that has been called a 
certain minimum number of days in advance of the time 
set for the meeting. In the case of special meetings it is 
also necessary to include in the notice a statement of all 



SECURITIES-ISSUING ORGANIZATIONS 528 

matters or questions that are to come up for consideration. 
Meetings may, of course, be called and notice waived by- 
consent of all the members of the body. This method is 
commonly used in calling the first meeting of stockholders 
and directors upon organizing a corporation. The follow- 
ing forms are illustrative of these points. 



FORM 32 

CALL AND WAIVER TO BRING TOGETHER FIRST 
MEETING OF STOCKHOLDERS 

We, the undersigned, being all of the incorporators and stock- 
holders of the Fit-Well Clothing Company, do hereby call the 
first meeting of the stockholders thereof, to be held in the office 
of H. Lyon, 37 Wall Street, New York City, June 16, 1921, at 
10 o'clock A.M., for the organization of the company and the 
transaction of all such business as may be incident thereto, and 
we hereby waive all requirements as to notice of such meeting 
and consent to the transaction thereat of any and all business 
pertaining to the affairs of the company. 

Julius Goldstein 
Max Engels 
William J. Friedman 

A. L. ROBBINS 

New York, June 16, 1921. John Golden 

In states that do not require the directors for the first 
year to be named in the charter, the call and waiver for the 
first meeting of stockholders usually sets forth the purposes 
as follows: 

" for the purpose of receiving charter, electing directors, adopting 
by-laws and the transaction of such other business as may be 
incident or necessary to the organization of the company." 

The call and waiver for first meetings of directors is 
similar to the above except in the statement of purposes 
which are usually given somewhat as follows: 



524 SUPPLEMENTARY FORMS 

" for the purpose of electing officers of the company, acting upon 
a proposition to exchange stock for property, and doing all such 
other things as may be necessary or desirable in connection with 
the organization of the company or for the promotion of its 
business." 



FORM 33 

NOTICE OF REGULAR OR ANNUAL MEETING OF 
STOCKHOLDERS 

Manhattan Railway Company, 
No. 165 Broadway, New York. 

The Annual Meeting of the Shareholders of the Manhattan 
Railway Company will be held at the Company's office. No. 165 
Broadway, Manhattan Borough, New York City, on Wednesday, 
November 10th, 1920, at 12 o'clock Noon. 

A Board of Directors for the ensuing year is to be elected, and 
three Inspectors of Election. 

The transfer books will not close. 

Alfred Skitt, President. 
P. V. Traique, Asst. Secretary. 
October 7th, 1920. 

The above is the simplest form of notice that can be 
used. It is, however, quite common to state the qualifica- 
tions of voters somewhat more definitely than in this case. 
For example, a notice to the stockholders of the Gulf States 
Steel Company contains the following: 

" The books for the transfer of the stock of the Company will 
not be closed, but no stock can be voted at said meeting which 
shall have been transferred on the books of the Company during 
the period of twenty days prior to said meeting." 

The Illinois Central Railroad Company, in closing its 
stock transfer books before an election gives notice of this 
to stockholders in the call and notice. 



SECURITIES-ISSUING ORGANIZATIONS 525 

" For the purpose of the Annual Meeting of Stockholders of 
the Illinois Central Railroad Company, to be held at Chicago, 111., 
on Wednesday, April 20, 1921, the Stock Transfer Books will 
be closed at 3 p.m. on Wednesday, April 6, 1921, and will remain 
closed until the morning of Thursday, April 21, 1921. 

Special matters of considerable importance, but some- 
what outside of the ordinary run of affairs, are usually 
mentioned in the notice to stockholders if they are to be 
brought up at the meeting. 



Special meetings of stockholders may be called (1) by 
the chief executive officers of the company, usually the 
president and the secretary, (2) by a stated per cent of the 
stockholders, (3) by all of the stockholders by means of a 
call and waiver of notice or (4) by resolution of the 
directors. In any event the notice and call must state fully 
the purpose of the meeting, and no matters other than 
those enumerated in the notice and call may be considered. 



FORM 34 

PRESIDENT'S CALL FOR SPECIAL MEETING OF 
STOCKHOLDERS 
Mr. L. Landau, 

Secretary of the Liberty Merchandise Co., Inc. 
You are hereby authorized and directed to send out notice 
of a special meeting of the Stockholders of this Company, hereby 
called by me, said meeting to be at No. 106 Forsyth St., New 
York City, on the 18th day of November, 1920, at 10 o'clock a.m., 
for the purpose of considering and acting upon a proposition to 
increase the capital stock from $12,500 to $50,000, at $25.00 a 
share, and for the transaction of any and all business in connec- 
tion therewith that may properly come before said meeting. 
(Date) J. Silverman, 

President. 



526 SUPPLEMENTARY FORMS 

The Secretary will thereupon send out a notice as 
follows : 

Liberty Merchandise Co., Inc. 
295 Broome St. 

Notice is hereby given to all the stockholders of the above 
corporation that a special meeting will take place on the 18th 
day of November, at 106 Forsyth St., New York City, at 10 
o'clock A.M. for the purpose of considering a proposition to in- 
crease the capital stock of the Company from $12,500 to $50,000, 
at $25.00 a share and for the transaction of any and all business 
in connection therewith that may properly come before said 
meeting. 

J. Silverman, Pres. 

L. Landau, Secy, 



FORM 35 

STOCKHOLDERS' REQUEST FOR SPECIAL MEETING 

To the Secretary of the 
A B Co. 

We, the undersigned, stockholders of the A B 

Company owning and controlling not less than two-thirds {or 
such amount as the by-laws may provide) of its entire voting 
stock, do hereby call a special meeting of the stockholders of the 

Company to be held at at o'clock, on . . . .day 

of , 19 .... , for the purpose of 

(Date) Names Shares Owned. 



The formal notice is thereupon sent out by the secretary. 



SECURITIES-ISSUING ORGANIZATIONS 527 



FORM 36 

SPECIAL MEETING OF STOCKHOLDERS BY CALL AND 

WAIVER 

We, the undersigned, being all the stockholders of the A 

B Company, hereby call a special meeting of the stock- 
holders of said Company to be held in the Company's offices at 

, on day of , 1921, at o'clock, for 

the purpose of considering (etc.) 

(Date) (Signed by all stockholders in person 

or proxy). 

A special meeting by call and waiver is, of course, useful 
only where the number of stockholders is small, conse- 
quently it is seldom used by large corporations. 



FORM 37 

DIRECTORS' RESOLUTION FOR SPECIAL MEETING 

Be It Resolved, That a special meeting of the stockholders of 
this Company be and hereby is called, said meeting to be held 

in the offices of the Company at on the day of 

, 1921, at o'clock for the purpose of (etc.) 

In all cases, except where the meeting is by call and 
waiver, the secretary sends out the official notice similar to 
that given in Form 34. 

Special meetings of directors may be called by the presi- 
dent of the company or chairman of the board of directors, 
by a stated number of the directors themselves, or by call 
and waiver of all of the directors. The forms differ little 
from those pertaining to special meetings of the stock- 
holders. 



528 SUPPLEMENTARY FORMS 

Proxies may be given by stockholders to others to 
represent them and to vote their stock at meetings. They 
may be (1) general in their authority and unlimited as to 
time, (2) limited as to time and general in authority, and 
(3) limited in both respects. They must bear a government 
re '/enue stamp to be valid. 



FORM 38 

GENERAL AND UNLIMITED PROXY 

I, hereby appoint Benjamin M. Squires my proxy with full 
authority to vote for me and in my place at any and all stock- 
holders' meetings of the Urban Motion Picture Industries, Inc. 

Witness my hand and seal this 7th day of October, 1920. 

A. H. Stockder (L. S.) 
Witnessed by 
G. A. Betz. 

Where the proxy is to be limited in any particular, such 
limitation must be clearly set forth in the grant of 
authority. In such cases it is usually somewhat more 
formal. When a corporation designates someone as proxy 
to vote in meetings of stockholders of a corporation whose 
stock it holds, the proxy must bear the official signature 
and seal of the corporation appointing the proxy. 



FORM 39 
REVOCATION OF PROXY 

Know All Men By These Presents : 

That I, the undersigned, do hereby revoke and annul any and 
all proxies or powers of attorney heretofore given by me, 
authorizing or empowering any person or persons to represent 
me, or vote for me or in my name or stead or act for me in any 



SECURITIES-ISSUING ORGANIZATIONS 529 

way whatsoever at any meeting or meetings of the stockholders of 

the A B Corporation. 

Witness my hand and seal this day of , 1921. 



In the presence of Signature (L. S.) 



Election Forms. — In holding elections of directors, and 

officers of the corporation it is essential that the whole 
procedure conform in all respects to statutory, charter and 
by-law requirements. In New York and other states an 
oath is prescribed for inspectors of election and also a form 
of an inspectors' certificate of election. 



FORM 40 

OATH OF INSPECTORS OF ELECTION 

State of New York, County of New York, ss: 
We, the undersigned, duly appointed to act as inspectors of 

election at the annual meeting of stockholders of the 

Company, No Street, in the City of New York, on the 

V . . day of 19. ... , being severally sworn, depose 

and say, and each for himself deposes and says, that he will 
faithfully execute the duties of inspector of election at such meet- 
ing with strict impartiality and according to the best of his 
abihty. 

John Smith 
William James 

Subscribed and severally sworn to before me this day 

of 19 

(Notarial Seal) Alfred Marsh, 

Notary Public. 



530 SUPPLEMENTARY FORMS 

FORM 41 

INSPECTORS' CERTIFICATE OF ELECTION 

The undersigned inspectors of election, duly appointed and 
qualified, do hereby certify that at the regular annual meeting 

of stockholders of the Company, held at the office of said 

company, No Street, New York, on the .... day of 

, 19 , a quorum being present, we, after being first duly 

sworn by oath hereto annexed, did conduct the election for 
directors of said corporation, and that the vote taken thereat 
resulted in the election, by the plurahty set opposite their re- 
spective names, of the following directors to serve for the en- 
suing year. 

Names Votes Received 

John Johnson 125 

George Williams 108 

Charles Wilson 117 

Witness our hands this day of , 19 

William Spruce. 
John Jacobs. 

State of New York, County of New York, ss: 

Before me, a notary public, on this day of , 

19 , personally appeared William Spruce and John Jacobs, 

to me well known to be persons described in and who executed 
the foregoing certificate, and severally acknowledged that they 
executed the same for the uses and purposes therein set forth. 

Martin Marks, 
(Notarial Seal.) Notary Pubhc for County of New York. 



FORM 42 

NOTICE OF ELECTION AS DIRECTOR 

Fit-Well Clothing Corporation, 

Dear Sir: ^^^ ^^^^ ^'^^• 

You are hereby notified that at the annual meeting of the 

stockholders of the Fit-Well Clothing Corporation held on , 

19 , you were elected a member of its Board of Directors. 



SECURITIES-ISSUING ORGANIZATIONS 531 

The next regular meeting of the Board will be held in the office 

of the Company , , at o'clock , for 

the election of officers and for the transaction of such other 
business as may come before the meeting. 

You are requested to be present and take part in that meeting. 

Respectfully, 



Secretary. 



FORM 43 

OATH OF OFFICERS 

State of , County of , ss : 

I, , being first duly sworn, on oath declare that I 

am a bona fide stockholder of the Union Cereal Company, and 
that at a regular {or special) meeting of the board of directors 
of said corporation, called and held in accordance with the laws 

of the state of and the articles of incorporation and 

by-laws of the said corporation on the day of , 

19...., I was duly and regularly elected to the office of presi- 
dent (or other office) and that I accept the trust imposed in me 
by said election; and I promise and swear that during all th© 
time of holding said office I will support and obey the Constitu- 
tion and laws of the United States, the constitution and laws of 

the state of , and the articles of incorporation and 

by-laws of said corporation, and will at all times faithfully, im- 
partially and diligently perform and carry out the duties of said 
office to the best of my ability. 

(Signed) 

Subscribed and sworn to before me this day of 

19 



Notary Public in and for the state of , etc. 



532 SUPPLEMENTARY FORMS 

FORM 44 
TREASURER'S BOND 

Know All Men By These Presents: 

That We, Max Engels of New York City, as principal, and 
William H. Flint, of New York City, and John H. Strong of 
Brooklyn, New York, as sureties, are held firmly bound unto the 
Fit-Well Clothing Corporation, duly organized under the laws of 
the State of New York, in sum of Five Thousand Dollars ($5,000), 
to the payment of which to the said corporation, its successors, 
or assigns, we do by these presents jointly and severally bind 
ourselves, our heirs, executors, and administrators, 
ministrators. 

Signed and sealed this 23rd day of June, 1921. 

The condition of the above obhgation is that: 
Whereas, the said Max Engels has been elected Treasurer of the 
said Fit-Well Clothing Corporation for the period of one year 
from the 23rd day of June, 1921, and may hereafter be re- 
elected to continue in such office for a further period : 

Now, Therefore, If the said Max Engels shall hereafter in all 
respects fully, faithfully, and honestly perform and discharge the 
duties of said office so long as he shall continue therein, both 
during the term for which he has been elected and during such 
further time as he may continue therein, whether by re-election 
or otherwise, and shall when properly so required, fully and 
faithfully account to the said Corporation, its successors, or 
assigns, for all moneys, goods, and properties whatsoever, for or 
with which the said Max Engels may in any wise be accountable 
or beholden to the said Corporation, and if at the expiration of 
his term of or continuance in office, or prior thereto in the event 
of his death, resignation or removal from office, all books, papers, 
vouchers, money, and other property of whatsoever kind placed 
in his custody as Treasurer of said Corporation, shall be forth- 
with restored to the said Corporation, its successors, or assigns, 
then this obligation shall be void, but otherwise to remain in full 
force and effect. 

Signed, sealed and delivered Max Engels (L. S.) 
in the presence of William H. Flint (L. S.) 

John A. Smith, John H. Strong (L. S.) 

Henry Z. Jones. 



SECURITIES-ISSUING ORGANIZATIONS 533 

Dividends and Financial Matters. — Dividends are de- 
clared by resolution of the board of directors out of the 
net earnings of the corporation. Such a resolution may 
simply set aside and appropriate a stated sum to be used 
to pay a stipulated dividend on all classes of stock out- 
standing, or it may declare a dividend of a specified per cent 
to be paid out of the net earnings on each class of stock, 
respectively. In any case it should direct the treasurer to 
give notice of the dividend and to pay it when it is due to 
stockholders of record as of a specified day. 



FORM 45 
DIRECTORS' RESOLUTION DECLARING DIVIDEND 

Resolved, That the sum of Five Thousand Dollars ($5,000) be 
and hereby is appropriated and set aside from the surplus profits 
of this company for the payment of the regular One and Three 
Quarters Per Cent {!%%) quarterly dividend upon its out- 
standing stock, said dividend to be due and payable on the 1st 
day of April, 1921, to the stockholders of record as shown by the 
books of the Company at the close of business on the 15th day 
of March. 

Resolved Further, That the Treasurer of this Company be 
hereby authorized and instructed to give due notice of such 
dividend and to pay the same when due. 



FORM 46 

RESOLUTION DECLARING DIVIDEND ON PREFERRED 
STOCK ONLY 

Resolved, That the semi-annual dividend of Three Per Cent 
(3%) upon the outstanding Preferred Stock of the Company be 
and hereby is declared from the surplus profits, said dividend to 
be paid on the first day of December, 1920, at the Liberty Na- 
tional Bank, 120 Broadway, New York City, to holders of record 



rjM SUPPLEMENTARY FORMS 

at the close of business, Thursday, November 11, 1920, and 
that the Treasurer of this Company be hereby instructed and 
fully authorized to give the same on the date set forth. 

If the stock has no par value the resolution states the 
amount of the dividend to be paid on each share in dollars 
and cents as follows: 

Resolved, that a regular quarterly dividend of One Dollar and 
Fifty Cents ($1.50) on each share of Common Stock outstanding 
be and hereby is declared, payable, etc 



FORM 47 
TREASURER'S NOTICE OF DIVIDEND 

American Hide & Leather Co. 
New York, October 26, 1920. 
A dividend of 1%% has this day been declared upon the pre- 
ferred capital stock of the company, payable out of the accumu- 
lated net profits arising from the business of the Corporation, 
payable on January 3, 1921, to stockholders of record at the 
close of business December 11, 1920. 

Geo. a. Hill, Treasurer. 

FORM 48 
NOTICE OF DIVIDEND IN FORM OF PROPERTY 

Hocking Valley Products Company. 
Dividend No. 1. 

The Board of Directors of the Hocking Valley Products 
Company at a meeting held on October 21st, 1920, have declared 
out of the net earnings and profits of the company for 
and during the year 1920 a dividend of 5% upon the capital 
stock of the Company as now authorized and constituted, such 
dividend to be payable, however, only in United States of America 
Fourth Liberty 4%% Bonds with coupon due April 15th, 1921, 
and subsequent coupons attached. 

The said dividend shall be payable on November 18th, 1920, 



SECURITIES-ISSUING ORGANIZATIONS 535 

to the stockholders of record at the close of business on November 
8th, 1920. 

Where the amount of any dividend payment, or any part 
thereof, is not Fifty Dollars ($50.), or a multiple thereof, pay- 
ment shall be made in cash on the basis of 90% as the current 
market price of such goods instead of in said bonds. 

The books of the Company will be closed on November 8, 1920, 
and remain closed until the opening of business on November 
19th, 1920. 

Such dividend is payable only upon and in respect to the 
present authorized capital stock of the company of the par 
value of $10 each per share, and stockholders having voting 
Trust Certificates, or former stock of the Company of $100 per 
share par value, or $20 per share par value, are requested to 
take proper steps for exchange of such certificates or stock into 
the present authorized and existing capital stock of the Company. 

S. L. Chamberlain, President. 



FORM 49 

FINANCIAL STATEMENT OF A CORPORATION 

Pettibone Mulliken Co. 
General Balance Sheet, December 31, 1918. 

Assets 

Real estate, factory, etc $1,499,989 

Patents & good-will 6,201,448 

Deferred charges 

Current assets — 

Cash $811,339 

Treasury securities 350,957 

Notes Receivable 35,500 

Accounts receivable 553,572 

Inventories 710,684 

U. S. Liberty Loan Bonds 100,750 

Total current assets 2,562,802 

Total assets $10,264,239 



536 SUPPLEMENTARY FORMS 

Liabilities 

First pfd. stock $1,000,000 

Second pfd. stock 750,000 

Common stock 7,000,000 

Special surplus 

Profit and loss surplus 1,166,382 

Current liabilities — 

Accounts payable I 97,857 

Reserve for taxes, etc 250,000 

Total curreM liabilities $347,857 

Total liabilities $10,264,239 

Corporate Signatures. — In general business transactions 
the corporation may be bound by the signature of its duly 
appointed agents in all matters delegated to them. In the 
more important transactions the '^ official signature " of the 
corporation is necessary, and in all legal and formal docu- 
ments and contracts the '' corporate signature " should be 
used with the seal. 



FORM 50 
OFFICIAL SIGNATURE 



Julius Goldstein, 
President. 



or more formally 



Julius Goldstein, 
President, Fit-Well Clothing 
Corporation. 



SECURITIES-ISSUING ORGANIZATIONS 537 

FORM 51 
CORPORATE SIGNATURE — INFORMAL 

Fit-Well Clothing Corporation, 
By Julius Goldstein, 
President, 

(In the above a rubber stamp is sometimes used and the signa- 
ture of the president filled in in writing) . 

FORM 52 

CORPORATE SIGNATURE — FORMAL 

Pettibone Mulliken Company, 
By A. H. Mulliken, President 
(Corporate) H. R. Prest, Secretary. 

(Seal) 

The signatures to formal instruments are usually pre- 
ceded by a " testimonium clause " as follows: 

In Witness Whereof, the said Pettibone Mulliken Company has 
caused its corporate name to be hereunto subscribed by its Presi- 
dent and its duly attested corporate seal to be hereunto affixed 
by its Secretary, all in the City of Chicago, State of lUinois, on 
the 22nd day of August, 1918. 

(Corporate) Pettibone Mulliken Company, 

(Seal) By A. H. Mulliken, 

Attest Seal: President. 

H. R. Prest, 
Secretary. 

Sale of Assets and Dissolution. — A sale of the entire 
assets of the corporation must ordinarily be authorized by a 
two-thirds or a three-quarters majority of all of the stock- 
holders. Upon such authorization the board of directors 
will draft and make a resolution to carry out the wishes 
of the stockholders. 



538 SUPPLEMENTARY FORMS 



FORM 53 

STOCKHOLDERS' RESOLUTION FOR SALE OF ENTIRE 

ASSETS 

Whereas, A. M. Lord as Trustee before the organization of the 
Consolidated Clothing Company, has made a proposition to 
purchase the entire plant and business of this company as a 
going concern, including all assets and liabilities, save cash in 
bank and on hand, for Five Thousand Dollars ($5,000) in cash 
and Fifty Thousand Dollars ($50,000) par value of the Con- 
sohdated Clothing Company. 

Now, Therefore, Be It Resolved, That the said proposition be 
hereby approved, and that the Directors of this Company be and 
hereby are fully authorized, instructed, and empowered to accept 
the said proposition for sale of its entire property and business, 
and to do all things necessary to carry such acceptance into effect 
according to the terms of said proposition. 



FORM 54 
DIRECTORS' RESOLUTION FOR SALE OF ENTIRE ASSETS 

Whereas, A proposition has been made by the Trustee of the 
Consolidated Clothing Company to purchase the entire property 
and business of this Company for Five Thousand Dollars ($5,000) 
in cash and Fifty Thousand Dollars ($50,000) in stock of the 
said proposed corporation as set forth in his written proposition 
heretofore ordered to be spread upon the minutes of this meet- 
ing; and 

Whereas, The Stockholders of this company in duly assembled 
meeting at which all the voting stock of the Company was repre- 
sented in person or by proxy, did by resolution unanimously 
carried, approve said sale and authorize and instruct this Board 
to accept said proposition: 

Now, Therefore, Be It Resolved, That the said proposition be 
and the same is hereby accepted by this Company on the terms 
set forth in said written proposition as entered upon the minutes 
of this meeting, and the President and Secretary of the Company 



SECURITIES-ISSUING ORGANIZATIONS 539 

are hereby empowered and instructed to execute all proper instru- 
ments to carry such acceptance into effect, and on behalf of this 
Company to receive the said Five Thousand Dollars ($5,000) in 
cash and Fifty Thousand Dollars ($50,000) in stock of the said 
Consolidated Clothing Company, and to do all such other things 
in connection with such sale and the said transfer of property as 
may be found necessary for its proper consummation. 

A private business corporation may be dissolved in any- 
one of the following ways: (1) expiration of the charter, 
(2) repeal of the charter by the legislature, (3) by volun- 
tary action of the corporation, (4) by forfeiture for viola- 
tion of the law, and (5) through the death of all of its 
stockholders in the absence of heirs. 

The procedure to be followed in case of voluntary dis- 
solution is clearly defined in the corporation statutes of 
each state. It must be authorized by resolution of the 
Stockholders and carried out by the directors in a manner 
similar to that set forth for the sale of the entire assets. 
This procedure varies considerably, but in all cases official 
notice must be given by a proper state authority. 



FORM 55 
NOTICE OF DISSOLUTION 

State of New York^ Office of the Secretary of State ss: 

This certificate issued in duplicate, hereby certifies that the 
Haster Columbus Company, Inc., a domestic stock corporation, 
has filed in this office on this 26th day of February, 1921, papers 
for the voluntary dissolution of said corporation under section 
221 of the General Corporation Law, and that it appears there- 
from that such corporation has complied with said section in 
order to be dissolved. 

WITNESS my hand and the seal of office of the Secretary of 
State, at the City of Albany, this twenty-sixth day of February, 
one thousand nine hundred and twenty-one. 

(Seal) A. B. Parker, Deputy Secretary oj State. 



540 SUPPLEMENTARY FORMS 

3. THE BUSINESS TRUST 

FORM 56 

AGREEMENT AND DECLARATION OF TRUST OF THE 
MASSACHUSETTS GAS COMPANIES 

THIS AGREEMENT, made this twenty-fifth day of Septem- 
ber, A.D. nineteen hundred and two, by and between Charles 
Francis Adams, 2nd, Walter Cabot Baylies, Samuel Carr, 
Robert Clarence Pruyn, Joseph Ballister Russell, Frederic Elmer 
Snow, Charles Augustus Stone, Albert Strauss, Christopher Minot 
Weld, and Robert Winsor, together with their successors (herein 
designated as the "Trustees"), and Francis H. Peabody, Frank 
G. Webster, Frank E. Peabody, and Robert Winsor, co-partners, 
carrying on business in the city of Boston under the name of 
Kidder, Peabody & Company, and James Seligman, Isaac N. 
Seligman, Henry Seligman, Jefferson Seligman, Emil Carlebach, 
Albert Strauss, and Frederick Strauss, co-partners carrying on 
business in the city of New York under the name of J. & W. 
Seligman & Company, together with their assigns (herein desig- 
nated as the " Subscribers "), witnesseth: 

WHEREAS it is proposed that the Trustees shall acquire 
from the subscribers, upon such terms and conditions as may 
be agreed upon, certain property and cash, and shall employ 
and manage the same and all other property which they may 
hereafter acquire as such Trustees, in the manner hereinafter 
stated; and it is hkewise proposed that the beneficial interest in 
the property, from time to time held by the Trustees, and in 
the business conducted by them, shall be divided into shares to 
be evidenced by certificates therefor, as hereinafter provided: 

NOW, THEREFORE, the Trustees hereby declare that they 
will hold said property and cash so to be acquired by them, as 
well as all other property which they may acquire as such Trus- 
tees, together with the proceeds thereof, in trust, to manage 
and dispose of the same for the benefit of the holders, from time 
to time of the certificates of shares issued and to be issued here- 
under, according to the priorities expressed in said certificates, 
and in the manner and subject to the stipulations herein con- 
tained, to-wit; 



SECURITIES-ISSUING ORGANIZATIONS 541 

FIRST. The Trustees, in their collective capacity, shall be 
designated, so far as practicable, as the " Massachusetts Gas 
Companies " and under that name shall, so far as practicable, 
conduct all business and execute all instruments in writing, in the 
performance of their trust. 

SECOND. The Trustees shall be ten in number; and, of the 
Trustees herein mentioned by name, Charles Francis Adams, 2nd, 
Walter Cabot Bayhes, Samuel Carr, Robert Clarence Pruyn, and 
Joseph Ballister Russell shall hold office until the first annual 
meeting of the shareholders, and Frederic Elmer Snow, Charles 
Augustus Stone, Albert Strauss, Christopher Minot Weld and 
Robert Winsor shall hold office until the second annual meeting 
of the shareholders, except that said Trustees, as well as any 
Trustees hereafter elected, shall in all cases hold office until their 
successors have been elected, and accepted this trust. 

The shareholders shall, at each annual meeting, or adjournment 
thereof, elect five Trustees to serve for the term of two years 
next ensuing. In the case of the death, resignation, or inability to 
act of any of said Trustees, the remaining Trustees shall fill any 
vacancies for the unexpired term. As soon as any trustees elected 
by the shareholders or by the remaining Trustees to fill a vacancy 
have accepted this trust, the trust estate shall vest in the new 
Trustees or Trustee, together with the continuing Trustees, with- 
out any further act or conveyance. 

Upon the election of an^^ Trustee either by the remaining 
Trustees to fill a vacancy, or by the shareholders, he shall forth- 
with execute a written acceptance of this trust, which, together 
with a certificate of the Secretary of the election of such trustee 
shall be forthwith filed with the Trust Company at that time 
having the custody of the duplicate of the original of this 
instrument. 

THIRD. The Trustees are authorized to engage — 

(a) In the business of manufacturing, buying, selling and deal- 
ing in coal, oil, coke, gas and all products thereof; 

(b) In the business of manufacturing and supplying gas or 
electricity or any other agent for light, heat, power, or other 
purposes; 

(c) In the business of acquiring, owning, managing, exchanging, 
selling, and dealing in the stocks, shares and securities of cor- 



542 SUPPLEMENTARY FORMS 

porations, trusts or associations engaged, in whole or m part, in 
any business above mentioned, or in owning or operating railways 
or railroads or transporting passengers, merchandise, mails or ex- 
press matter, or in manufacturing, selling or repairing machines, 
equipm.ents, supplies, or other articles used by corporations, trusts 
or associations of any of the classes above mentioned, and or in 
the business of acquiring, owning, managing, exchanging, selhng, 
or deahng in the stocks, shares or securities of any corporation, 
trust or association which owns, or whose stock or securities are 
based upon or secured by the stocks or securities of any cor- 
poration, trust or association of the character above mentioned; 

(d) In any business similar in character to that above men- 
tioned which the trustees may deem expedient, and to acquire, 
hold, and dispose of the stocks, shares or securities of corpora- 
tions, trusts or associations doing business of a character similar 
to any business above described. 

The Trustees shall hold the legal title to all property at any 
time belonging to this trust, and, subject only to the specific limi- 
tations herein contained, they shall have the absolute control, 
management, and disposition thereof, and shall likewise have the 
absolute control of the conduct of all business of the trust; and 
the following enumeration of specific duties and powers shall not 
be construed in any way as a limitation upon the general powers 
intended to be conferred upon them. 

The Trustees shall have authority to adopt and use a common 
seal; to make all such contracts as they may deem expedient in 
the conduct of the business of the trust; from time to time to 
release, sell, exchange, or otherwise dispose of, at public or private 
sale, any or all of the trust property, whether real or personal, 
for such prices either in cash or the stock, shares, or securities 
of other corporations, trusts or associations and upon such terms 
as to credit or otherwise as they may deem expedient, to guaran- 
tee or assume the obligations of other corporations, trusts or as- 
sociations and to enter into such agreements by way of indemnity 
or otherwise as they may deem expedient in connection with the 
acquisition of property from the subscribers as hereinbefore pro- 
vided or otherwise; to confer, by way of substitution, such power 
and authority on the President, Treasurer, Secretary, and Execu- 
tive Committee, and other officers and agents appointed by them, 



SECURITIES-ISSUING ORGANIZATIONS 543 

as they may deem expedient; to borrow money for the purpose 
of the trust and give the obhgations to the Trustees therefor; 
to loan any money from time to time in the hands of the 
Trustees, with or without security, on such terms as they may 
deem expedient; to subscribe for, acquire, own, sell, or otherwise 
dispose of such real or personal property, including the stocks, 
shares, and securities of any other corporations, trusts or associa- 
tions, as thej^ may deem expedient in connection with the purposes 
of the trust; to vote in person or by proxy on all shares of stock 
at any time held by them, and to collect and receive the income, 
interest, and profits of any such stock or securities; to collect, 
sue for, receive, and receipt for all sums of money at any time be- 
coming due to said trust; to employ counsel and to begin, prose- 
cute, defend, and settle suits at law, in equity or otherwise, and to 
compromise or refer to arbitration any claims in favor of or 
against the trust ; and in general to do all such matters and things 
as in their judgment will promote or advance the business which 
they are authorized to carry on, although such matters and things 
may be neither specifically authorized nor incidental to any mat- 
ters or things specifically authorized. In addition to the powers 
herein granted the Trustees shall have all powers with reference 
to the conduct of the business and management of the property 
of the trust which are possessed by directors of a manufacturing 
corporation under the laws of the Commonwealth of Massa- 
chusetts. 

So far as strangers to the trust are concerned, a resolution of 
the Trustees authorizing a particular act to be done shall be 
conclusive evidence in favor of strangers that such act is within 
the power of the Trustees; and no purchaser from the Trustees 
shall be bound to see to the application of the purchase money 
or other consideration paid or delivered by or for said purchaser 
to or for the Trustees. 

FOURTH. Stated meetings of the Trustees shall be held at 
least once a month, and other meetings shall be held from time 
to time upon the call of the President or any three of the 
Trustees. A majority of the Trustees shall not be necessary to 
the vahdity of any action taken by them, but the decision ex- 
pressed by vote of a majority of the Trustees present and voting 
at any meeting shall be conclusive. 



544 SUPPLEMENTARY FORMS 

The Trustees may make, adopt, amend, or repeal such by-laws, 
rules, and regulations not inconsistent with the terms of this 
instrument as they may deem necessary or desirable for the 
conduct of their business and for the government of themselves, 
their agents, servants and representatives. 

FIFTH. The Trustees shall annually elect from among their 
number a President, and shall also elect from among their num- 
ber or otherwise, a Treasurer, a Secretary, and, in their dis- 
cretion, one or more Vice-Presidents, and one or more Assistant 
Treasurers or Secretaries, and they shall have authority to ap- 
point such other officers, agents, and attorneys as they may 
deem necessary or expedient in the conduct of their business. 
They shall also have authority to accept resignations and to fill 
any vacancies in the officers appointed by them, for the unexpired 
term, and shall likewise have authority to elect temporary offi- 
cers to serve during the absence or disability of regular officers. 
They may also by a majority vote of all the Trustees, remove any 
officer or agent elected or appointed by them. 

The President, Treasurer, and Secretary shall have the author- 
ity and perform the duties usually incident to those offices in the 
case of corporations, so far as apphcable thereto, and shall have 
such other authority and perform such other duties as may from 
time to time be determined by the Trustees. The Trustees shall 
fix the compensation, if any, of all officers and agents whom they 
may elect or appoint, and may also pay to themselves such com- 
pensation for their own services as they may deem reasonable. 

The Trustees may also appoint from among their number an 
Executive Committee of three or five persons, to whom they may 
delegate such of the powers herein conferred upon the Trustees 
as they may deem expedient. 

The Trustees shall cause to be kept by the Secretary elected 
by them a record of all meetings of the shareholders. Trustees 
and Executive Committee, which record shall be of the same char- 
acter and effect as that kept in the case of corporations, and so 
far as strangers to the trust are concerned, shall be conclusive 
against the Trustees of the facts and doings therein stated. 

The Trustees shall not be liable for any error of judgment, 
or for any loss arising out of any act or omission in the execution 
of this trust, so long as they act in good faith, nor shall they be 



SECURITIES-ISSUING ORGANIZATIONS 545 

personally liable for the acts or omissions of each other, or for 
the acts or omissions of any officer, agent, or servant elected or 
appointed by or acting for them; and they shall not be obhged 
to give any bond to secure the due performance of this trust 
by them. 

Any Trustee may acquire, own, and dispose of shares in this 
trust to the same extent as if he were not a Trustee. 

SIXTH. The beneficial interest in this trust shall, in the first 
instance, be divided into three hundred thousand (300,000) 
shares of the par value of one hundred (100) dollars each, of 
which one hundred and fifty thousand (150,000) shares shall be 
preferred and one hundred and fifty thousand (150,000) common. 

The preferred shares shall entitle the holder to receive out of 
the net profits of the trust, a semi-annual, preferential, cumula- 
tive dividend at the rate of four per centum per annum, and no 
more, commencing to accrue on the first day of December, 1902, 
payable on the first days of June and December in each year, 
and to be paid or provided for before any dividend shall be set 
apart or paid on the common shares, provided that after the 
payment or setting aside of a semi-annual dividend on the pre- 
ferred shares at the rate of four per centum per annum, all pre- 
viously accrued dividends thereon having been paid or set aside, 
the Trustees may forthwith, without waiting for the expiration 
of the year, pay or set aside a semi-annual dividend on the 
common shares; and, in case of liquidation, the proceeds of 
liquidation shall be first apphed to the payment to the holders 
of preferred shares of the sum of one hundred dollars per share 
and accrued and unpaid dividends thereon, and the balance re- 
maining thereafter shall be divided among the holders of common 
shares in proportion to their holdings. 

As evidence of the ownership of said shares the Trustees shall 
cause to be issued to each shareholder a negotiable certificate, or 
certificates, to be signed by such transfer agent or transfer agents 
and registrar or registrars as the trustees may determine, and by 
the President or any Vice-President, and attested by any Secretary 
or Assistant Secretary, which certificates shall be in the form 
following, to-wit: 



54,6 SUPPLEIVIENTARY FORMS 

Massachusetts Gas Companies 

No. Preferred Shares. 

Not subject to assessment. 

This certifies that 

is the holder of Preferred Shares in the 

Massachusetts Gas Companies, which he holds subject to an 
Agreement and Declaration of Trust dated September 25th, 1902, 

a duplicate original of which is on file with the 

Trust Company, and which is hereby referred to and made a 
part of this certificate. 

The shares in the Massachusetts Gas Companies are of the 
par value of one hundred dollars each, and are divided into 
preferred and common shares. 

It is mutually agreed between the holder hereof and the 
Massachusetts Gas Companies and its shareholders as follows: 
that the preferred shares are entitled out of the net profits of the 
Companies to a semi-annual, preferential, cumulative dividend 
at the rate of four per centum per annum, and no more, com- 
mencing to accrue on the 1st day of December, 1902, payable on 
the first days of Junq and December in each year, and to be paid 
or provided for before any dividend shall be set apart or paid 
on the common shares, provided that after the payment or 
setting aside of a semi-annual dividend on the preferred shares 
at the rate of four per cent per annum, all previously accrued 
dividends thereon having been paid or set aside, the Massachusetts 
Gas Companies may forthwith, without waiting for the expira- 
tion of the year, pay or set aside a semi-annual dividend on the 
common shares; that in the event of liquidation the proceeds of 
liquidation shall be first applied to the payment, to holders of 
the preferred shares, of the sum of one hundred dollars per share 
and accrued and unpaid dividends thereon, and the balance re- 
maining thereafter shall be divided among the holders of common 
shares in proportion to their holdings; that the holders of pre- 
ferred and common shares shall have equal voting powers, and 
that the preferred and common shares may be increased or re- 
duced as provided in the Agreement and Declaration of Trust 
herein referred to. 

This certificate must be signed by the Transfer Agent and 



SECURITIES-ISSUING ORGANIZATIONS 547 



Registrar of the shares of the Massachusetts Gas Companies, 
who sign solely to indicate that the shares represented by this 
and all other outstanding certificates bearing their signatures do 
not exceed the issue of shares fixed by the votes of the 
Massachusetts Gas Companies. 

No transfer hereof will be of any effect as regards the Massa- 
chusetts Gas Companies until this certificate has been surrendered 
and the transfer recorded upon their book. 

IN WITNESS WHEREOF, the Trustees under said Declara- 
tion of Trust herein designated as the Massachusetts Gas 
Companies, have caused their common seal to be hereto affixed 
and this certificate to be executed in their name and behalf, 

by their President, and attested by their 

Secretary, this day of 19 . . . 

Massachusetts Gas Companies. 

By President. 

Attest : 

By , Secretary. 

By , Transfer Agent. 

By , Registrar. 

By 

Notice. — The signature to thi^ 1 YoV Value received 

assignment must correspond -witn 

the name as written upon the face hereby Sell, assigii, and transfcf 

of the certificate m every particu- ^ ' ^ ' 

lar, without alteration or enlarge- UlltO 

ment or any change whatever. J 

preferred shares of 

the Massachusetts Gas Com- 
panies, represented by the 
within certificate, and do hereby 
irrevocably constitute and ap- 
point 

attorney, to trans- 
fer the said shares on the books 
of the within-named Com- 
panies, with full power of sub- 
stitution in the premises. 



Witness .... 
In presence of. 



hand this day of. 



548 SUPPLEMENTARY FORMS 

Massachusetts Gas Companies 
No. Common Shares. 

Not subject to assessment. 

This certifies that 

is the holder of Common Shares in the 

Massachusetts Gas Companies, which he holds subject to an 
Agreement and Declaration of Trust dated September 25th, 1902, 
a duplicate original of which is on file with the Old Colony Trust 
Company, and which is hereby referred to and made a part of 
this certificate. 

The shares in the Massachusetts Gas Companies are of the 
par value of one hundred dollars each, and are divided into 
preferred and common shares. 

It is mutually agreed between the holder hereof and the 
Massachusetts Gas Companies and its shareholders as follows: 
that the preferred shares are entitled out of the net profits of 
the Companies to a semi-annual, preferential, cumulative dividend 
at the rate of four per centum per annum, and no more, com- 
mencing to accrue on the last day of December, 1902, payable 
on the first days of June and December in each year, and to be 
paid or provided for before any dividend shall be set apart or 
paid on the common shares, provided that after the payment 
or setting aside of a semi-annual dividend on the preferred 
shares at the rate of four per centum per annum, all previously 
accrued dividends thereon having been paid or set aside, the 
Massachusetts Gas Companies may forthwith, without waiting 
for the expiration of the year, pay or set aside, a semi-annual 
dividend on the common shares; that in the event of liquidation 
the proceeds of hquidation shall be first apphed to the payment, 
to holders of the preferred shares, of the sum of one hundred 
dollars per share and accrued and unpaid dividends thereon, and 
the balance remaining thereafter shall be divided among the 
holders of common shares in proportion to their holdings; that 
the holders of preferred and common shares shall have equal 
voting powers; and that the preferred and common shares may 
be increased or reduced as provided in the agreement and Declara- 
tion of Trust herein referred to. 



SECURITIES-ISSUING ORGANIZATIONS 549 

This certificate must be signed by the Transfer Agent and 
Registrar of the shares of the Massachusetts Gas Companies, who 
sign solely to indicate that the shares represented by this and all 
other outstanding certificates bearing their signatures do not 
exceed the issue of shares fixed by the votes of the Massachusetts 
Gas Companies. 

No transfer hereof will be of any effect as regards the 
Massachusetts Gas Companies until this certificate has been 
surrendered and the transfer recorded upon their books. 

IN WITNESS WHEREOF, the Trustees under said Declara- 
tion of Trust herein designated as the Massachusetts Gas 
Companies, have caused their common seal to be hereto affixed 
and this certificate to be executed in their name and behalf, 

by their President and attested by their Secretary, this 

day of 19... 

Massachusetts Gas Companies. 

By President. 

Attest : 

By , Secretary. 

By , Transfer Agent. 

By , Registrar. 

By 

For value received 

hereby sell, assign, and transfer 

unto 

common shares of 

the Massachusetts Gas Com- 
panies represented by the within 
certificate, and do hereby irrev- 
ocably constitute and appoint 

attorney 

to transfer the said shares on 
the books of the within-named 
Companies, with full power of 
substitution in the premises. 

Witness hand this day of 

In presence of 



Notice. — The signature to this 
assignment must correspond with 
the name as written upon the face 
of the certificate in every particu- 
lar, without alteration or enlarge- 
ment or any change whatever. 



550 SUPPLEMENTARY FORMS 

SEVENTH. The shares hereunder shall be transferable by an 
appropriate instrument in writing and upon the surrender of the 
certificate therefor, but no such transfer shall be of any effect as 
regards the Trustees until it has been recorded upon the books 
of the Trustees kept for that purpose. 

EIGHTH. The trustees shall issue to the Subscribers, or their 
assigns, certificates for said original three hundred thousand 
shares, in payment for and as evidence of their ownership of the 
beneficial interest in the property and cash proposed to be trans- 
ferred to the Trustees by the Subscribers, as hereinbefore stated. 

NINTH. For any of the purposes of the Trust the number 
of shares may from time to time, with the consent of the holders 
of not less than two-thirds of such of the shares as are repre- 
sented and voted upon at any meeting called for that purpose, 
but not otherwise, be increased or reduced. In case the number 
of shares is increased, the additional shares shall be issued and 
disposed of upon such terms and in such manner as the share- 
holders at such meeting may determine, and in case of such in- 
crease such proportion of the new shares may be made preferred 
as the shareholders in authorizing such increase may determine. 

TENTH. In case of the loss or destruction of any certificate 
for shares the Trustees may, under such conditions as they may 
deem expedient, issue a new certificate or certificates in place of 
the one lost or destroyed. 

ELEVENTH. The Trustees may, with the consent of the 
holders of at least two-thirds of each class of shares outstanding, 
given at a meeting called for that purpose, but not otherwise, 
mortgage or pledge any property in their hands, upon such terms 
and for such purposes as the shareholders at such meeting may 
approve. 

TWELFTH. The Trustees may from time to time declare and 
pay dividends out of the net earnings from time to time received 
by them but the amount of such dividends and the payment of 
them shall be wholly in the discretion of the Trustees, except 
that the dividends on the preferred shares shall be payable semi- 



SECURITIES-ISSUING ORGANIZATIONS 551 

annually on the first day of June and December in each year, 
at the rate of four per centum per annum and no more, and shall 
be cumulative, and said semi-annual dividends shall be paid or 
set apart before any dividends are paid on the common shares. 

THIRTEENTH. The fiscal year of the Trustees shall end on 
the first day of July in each year. 

Annual meetings for the election of Trustees and for the trans- 
action of other business shall be held in Boston, on the second 
Tuesday of October in each year, beginning with the year 1903, 
of which meetings notice shall be given by the Secretary by mail- 
ing such notice to each shareholder at his registered address at 
least ten days before said meeting. 

Special meetings of the shareholders may be called at any 
time upon seven days' notice, given as above stated, when 
ordered by the President or Trustees. 

At all meetings of the shareholders, each holder of shares, 
whether preferred or common, shall be entitled to one vote for 
each share held by him; and any shareholder may vote by proxy. 

No business shall be transacted at any special meeting of the 
shareholders unless notice of such business has been given in 
the call for the meeting. No business, except to adjourn, shall 
be transacted at any meeting of the shareholders unless the 
holders of a majority of all the shares outstanding are present in 
person or by proxy. 

FOURTEENTH. Shares hereunder shall be personal prop- 
erty, giving only the rights in this instrument, and in the certifi- 
cates thereof, specifically set forth. The death of a shareholder 
during the continuance of this trust shall not operate to de- 
termine this trust, nor shall it entitle the representatives of the 
deceased shareholder to an accounting or to take any action in 
the courts or elsewhere against the Trustees; but the executors, 
administrators, or assigns of any deceased shareholder shall suc- 
ceed to the rights of said decedent under this trust, upon the 
surrender of the certificate of shares owned by them. 

The ownership of shares hereunder shall not entitle the share- 
holders to any title in or to the trust property whatsoever, or 
right to call for a partition or division of the same, or 



552 SUPPLEMENTARY FORMS 

for an accounting; and no shareholder shall have any other or 
further rights than the right of a stockholder in a corporation, 
so far as the same may be applicable. 

FIFTEENTH. The Trustees shall have no power to bind the 
shareholders personally, or to call upon them for the payment of 
any sum of money or any assessment whatever other than such 
sums as they may at any time personally agree to pay by way of 
subscription to new shares or otherwise. All persons or corpora- 
tions extending credit to, contracting with, or having any claim 
against the Trustees shall look only to the funds and property of 
the trust for the payment of any such contract or claim, or for 
the payment of any debt, damage, judgment, or decree, or of 
any money that may otherwise become due or payable to them 
from the Trustees, so that neither the Trustees, shareholders, nor 
officers, present or future, shall be personally liable therefor. 

In every written order, contract, or obligation which the Trus- 
tees or officers shall give, authorize, or enter into, it shall be the 
duty of the Trustees and officers to stipulate, or cause to be 
stipulated, that neither the Trustees, officers, nor shareholders 
shall be held to any personal Hability under or by reason of such 
order, contract or obHgation. 

It is further expressly agreed that in case any Trustee, offi- 
cer, or shareholder shall at any time for any reason be held to 
or be under any personal hability as such Trustee, officer, or share- 
holder, not due to his acts in bad faith, then such Trustee, offi- 
cer, or shareholder, shall be held harmless and indemnified out of 
the trust estate from and of all loss, cost, damage, or expense by 
reason of such liability; and, if at any time the trust estate shall 
be insufficient to provide for such indemnity and to satisfy all 
liabilities of and claims upon it, then the trust estate shall, in 
preference and priority over any and all other claims or hens 
whatsoever, except mortgages, and except as otherwise expressly 
provided by law, be applied first to the indemnification of the 
Trustees from any loss, cost, damage or expense in connection 
with any personal liability which they may be under or have in- 
curred except as aforesaid; next, to the indemnification in the 
same manner of the officers, and thereafter to the indemnifica- 
tion in like manner of the shareholders. 



SECURITIES-ISSUING ORGANIZATIONS 553 

SIXTEENTH. This trust shall continue for the term of 
twenty-one years after the death of the last survivor of the per- 
sons whose names are signed hereto, at which time the then 
Trustees shall proceed to wind up its affairs, liquidate its assets, 
and distribute the same among the holders of preferred and com- 
mon shares: provided, however, that, if prior to the expiration 
of said period the holders of at least two-thirds of the shares then 
outstanding shall, at a meeting called for that purpose, vote to 
terminate or continue this trust, then said trust shall either forth- 
with terminate or continue in existence for such further period 
as may then be determined. For the purpose of winding up their 
affairs and liquidating this trust the then Trustees shall continue 
in office until such duties have been fully performed. 

SEVENTEENTH. This Agreement and Declaration of Trust 
may be amended or altered in any particular whatsoever, except 
as regards the exemption from personal liabihty of the Trustees, 
officers, and shareholders, and except as regards the priorities of 
the preferred shares, at any annual or special meeting of the 
shareholders, with the consent of the holders of at least two- 
thirds of the shares of each class then outstanding, provided 
notice of the proposed amendment or alteration shall have been 
given in the call for the meeting: and in case of such alteration 
or amendment the same shall be attached to and made a part 
of this agreement, and a copy thereof, with a certificate of the 
Secretary as to its adoption, shall be filed with the Trust Com- 
pany at that time having the custody of the duphcate original 
of this instrument. 

Nothing in this article contained shall in any way be construed 
to limit the power to increase or reduce the number of shares 
as provided in the ninth article hereof. 

EIGHTEENTH. A duplicate original of this Agreement and 
Declaration of Trust shall be deposited with such Trust Company 
in the City of Boston as the Trustees may from time to time 
designate, and the Trustees shall have power at any time to 
change the company with which such duplicate original is 
deposited. 

NINETEENTH. The Trustees from time to time shall de- 
termine whether and to what extent and at what time, and 



554 SUPPLEMENTARY FORMS 

placed under what conditions and regulations the accounts and 
books of the Trustees or any of them shall be open to the inspec- 
tion of the shareholders, and no shareholder shall have any right 
to inspect any account of book or document of the Trustees ex- 
cept as authorized by the Trustees or by resolution of the 
shareholders. 

7A^ WITNESS WHEREOF, the said Charles Francis 
Adams, 2d, Walter Cabot Baylies, Samuel Carr, Robert Clarence 
Pruyn, Joseph Balhster Russell, Frederic Elmer Snow, Charles 
Augustus Stone, Albert Strauss, Christopher Minot Weld, and 
Robert Winsor, Trustees hereinbefore mentioned, have hereunto 
set their hands and seals in token of their acceptance of the trust 
hereinbefore mentioned, for themselves and their successors, and 
the said Francis H. Peabody, Frank G. Webster, Frank E. Pea- 
body, and Robert Winsor, co-partners, carrying on business in 
the City of Boston under the name of Kidder, Peabody & Com- 
pany, and James SeHgman, Emil Carlebach, Albert Strauss and 
Frederick Strauss, co-partners, carrying on business in the City 
of New York, under the name of J. & W. Seligman & Company, 
have hereunto set their hand and seals in token of their assent to 
and approval of said terms of trust, for themselves and their 
assigns, the day and year first above written. 

(The signatures and seals of the above mentioned persons which 
appear at this point in the original followed by a notarial seal 
are here omitted). 

Sept. 25th, 1902. 

We, the undersigned, Trustees under an Agreement and Dec- 
laration of Trust of the Massachusetts Gas Companies dated the 
25th day of September, 1902, hereby acknowledge that we have 
received due notice of the meeting of said Trustees to be held at 
115 Devonshire St., Boston, Mass., on the 25th day of September, 
1902, at 10 o'clock a.m., for the purposes of organization, in- 
cluding the election of officers, adoption of by-laws and transac- 
tion of business incidental thereto, for the purpose of considering 
and acting upon a proposition from Kidder, Peabody & Com- 
pany and J. & W. Seligman & Company relative to the trans- 
fer to the Massachusetts Gas Companies of certain properties 
and cash as mentioned in the Declaration of Trust of said Massa- 



COMBINATION ORGANIZATION FORMS 555 

chusetts Gas Companies, and taking such action as may be neces- 
sary to carry the same into effect if the offer contained in said 
proposition is accepted; and we hereby consent and agree that 
said meeting shall be held at the time and place above mentioned 
for the purpose above stated. 
(Signed) 

Charles Francis Adams, 2nd. 
Walter Cabot Baylies 
Robert Clarence Pruyn 
Joseph Ballister Russell 
Frederic Elmer Snow 
Charles Augustus Stone 
Albert Strauss 
Christopher Minot Weld 
Robert Winsor. 
Samuel Carr. 

The stationery of the Massachusetts Gas Companies has 
printed in red ink in the upper right hand corner, the following: 

" The name 'Massachusetts Gas Companies ' is the designation 
of the Trustees for the time being under an agreement and dec- 
laration of Trust, dated 1902, and all persons dealing with the 
Massachusetts Gas Companies must look solely to the Trust 
property for the enforcement of any claim against the Companies, 
as neither the Trustees, Officers nor Shareholders assume any 
personal liabihty for obligations entered into on behalf of the 
Companies. 

C. FORMS PERTAINING TO COMBINATION 
ORGANIZATIONS 

FORM 57 

FACTOR'S AGREEMENT 

National Wall Paper Company ^ 

Memorandum of agreement between of 

(called. the purchaser) and the National Wall Paper Company 
of New York, N. Y., (called the company). 

1 Op. cit. N. Y. Trust Investigation, 1897, pp. 804-806. 



556 SUPPLEMENTARY FORMS 

1. The purchaser agrees to select and order from and out of 
jobbing hues of the machine made goods of the company on or 
before October 1, 1896, wall paper to the aggregate amount 

of $ , which hereby request the company 

to manufacture for prior to April 1, 1897, goods 

to be delivered F. 0. B. at New York, or at the respective places 
of manufacture. 

2. The terms of this sale are four (4) months from date of 
invoice, with a discount at the rate of one per cent per month 
for anticipated payments. Goods shipped between October 15th 
and March 1st to date from March 1st, and orders for goods 
not shipped before March 1, 1897, may be cancelled by either 
party to this agreement. 

3. The purchasers expressly guarantee and agree that between 
September 1, 1896, and June 30, 1897, will not purchase or 
acquire any wall paper or hangings the product of any person 
or corporation other than the company, and that will give addi- 
tional and duphcate orders prior to July 1, 1897, to the amount 

of $ , and in consideration of such guarantee and 

upon the performance thereof company shall credit the purchaser 
with the discounts hereinafter named on the attached schedule on 
all purchases from the jobbing lines of the machine made goods 
of the company between said dates. ^ Such discounts shall be 
figured and credited upon the basis of the shipments made here- 
under and the discounts shall be calculated upon the gross prices 
published by the company in its price list for the patterns 
selected by the purchaser. The purchasers guarantee as a con- 
dition of the allowance of such discounts to refrain from making 
such use thereof among the trade as to interfere with the uni- 
formity of the company's price and terms, and that (the pur- 
chaser) will at all times during this contract maintain the 
company's road prices. 

4. The company agrees to extend the same line of discounts 
referred to above to such goods as are contained in the exclusive 
hues of the machine made goods of the company, on the express 
guarantee that such goods will be used only for the retail depart- 
ment of the purchaser in the City of •. . . , and 

will not be offered at wholesale within his store or on the road. 

2 This sentence is thus in original. — Ed. 



COMBINATION ORGANIZATION FORMS 557 

This contract shall at all times and for every purpose be deemed 
to have been made and executed at the principal office of the 
company, in the City of New York, and it shall for every purpose 
be construed under the laws of the State of New York. 

Dated, the city of New York 1896. 



National Wall Paper Company, 
President. 

FORM 58 

A TYPICAL POOL AGREEMENT 

The Steel Rail Pool ^ 

Memorandum of agreement, entered into August 2, 1887, by 
and between the North Chicago Rolhng Mill Company, the 
Cambria Iron Company, the Pennsylvania Steel Company, the 
Union Steel Company, the Lackawanna Iron and Coal 
Company, the Johet Steel Company, the Western Steel Company, 
the Cleveland Rolling Mill Company, Carnegie Brothers & Co., 
Limited; Carnegie, Phipps & Co., Limited; the Bethlehem Iron 
Company, the Scranton Steel Company, the Troy Steel & Iron 
Company, the Worcester Steel Works and the Springfield Iron 
Company. 

We, the before-named companies and corporations, manu- 
facturers of steel rails, hereby mutually agree one with the other, 
that we will restrict our sales and the product of the steel rails 
of 50 pounds to the yard and upward, applying to orders taken 
by us and to be delivered by us or from our respective works 
during the year 1888, as hereinafter allotted and limited; and we 
respectively bind ourselves not to sell in excess of our current 
allotments, without first obtaining the consent of the Board of 
Control thereto — that is to say : 

It is agreed, there shall now be made an allotment of 800,000 
tons of rails, which shall be divided and apportioned to and 
among the several parties hereto to be sold by them during the 
year 1888, under the following basis of percentages, to wit; North 

1 Report of the Commissioner of Corporations on the Steel In- 
dustry. Part 1, pp. 69-71. 



558 SUPPLEMENTARY FORMS 

Chicago Rolling Mill Company, 12 1/2 per cent; Pennsylvania 
Steel Company, 9 8/10 per cent; Bethlehem Iron Company, 
9 per cent; Carnegie Bros. & Co., Limited, and Carnegie, 
Phipps & Co., Limited (jointly), 13 5/10 per cent; Joliet Steel 
Company, 8 per cent; Lackawanna Iron and Coal Company, 
9 per cent; Cambria Iron Company 8 per cent; Scranton Steel 
Company, 8 per cent; the Union Steel Company, 8 per cent; 
Cleveland Rolling Mill Company, 4 8/10 per cent; Troy Steel 
& Iron Company, 4 5/10 per cent; Western Steel Company, 
4 5/10 per cent; Worcester Steel Works, 1 4/10 per cent. 

And in addition to the said allotment of 800,000 tons of rails 
above allotted, an additional allottment of 250,000 tons is hereby 
made and allotted to the Board of Control, to be reallotted and 
reapportioned by it, as, and to whom, it may deem equitable, in 
the adjustment of any differences that may arise. It being also 
further agreed that all subsequent allotments of rails hereafter 
made, to be sold under this agreement during the year 1888, shall 
also be divided and apportioned to the several parties hereto in 
the same ratio of percentages as said apportionment of 800,000 
tons is herein divided and apportioned. 

It is further agreed, that the Board of Control shall, from time 
to time, make such further allotments as shall be necessary to at 
all times keep the unsold allotments at least 200,000 tons in 
excess of the total current sales, as shown by the monthly reports 
of sales. This is to be in addition to the then unappropriated 
part of the 250,000 tons herein before allotted to the Board of 
Control to adjust differences. 

It is further agreed, on the first day of April, July and October, 
the Board of Control are authorized and directed to cancel such 
part of the unmade allotments of the respective parties hereto 
as they, the said Board of Control, shall determine such party 
unable to make in due time, and all allotments so canceled the 
Board of Control shall have the right to reallot to any of the 
other parties hereto; it being understood that all such cancella- 
tions shall apply only to allotments standing to the credit of the 
respective parties hereto on the dates above named, but no 
reallotment as aforesaid shall be made by the Board of Control 
to any of the parties hereto for the purpose of enabhng them or 
any of them, to make and sell rails from foreign made blooms. 



COMBINATION ORGANIZATION FORMS 559 

It is further agreed, that all transfers of parts of allotments 
from one party to another shall be made by the Board of Control. 

It is further agreed, that there shall be a Board of Control, 
consisting of three members, namely Orrin W. Potter, Luther S. 
Bent and W. W. Thurston, who shall have power to employ 
a paid secretary and treasurer. 

It is further agreed, that the Board of Control, upon the 
written consent of 75 per cent of the percentages as hereinbefore 
named, shall increase the allotments for the year 1888, and such 
increase shall be allotted to the parties hereto as hereinbefore 
provided. 

It is further agreed, that each party whose name is hereunto 
annexed, shall and will make monthly returns to the Board of 
Control of all contracts for delivery of rails of 50 pounds to the 
yard and upward during the year 1888, and also of all shipments 
of such rails made by them during said year; a copy of such 
return shall be furnished to each party hereto. 

It is further agreed, that all the parties hereto shall and will, 
on or before January 15, 1888, make a written return to the 
Board of Control of all the rails of 50 pounds to the yard and 
upward (designating the weight) which they respectively had 
on hand January 1, 1888, stating whether the same are sold, 
and if sold on what order they apply. 

It is further agreed, that the Board of Control shall have the 
right whenever they deem it expedient to convene a meeting of 
the parties hereto, and they shall give at least ten days' previous 
notice of all meetings, and any business transacted at such meet- 
ings, and receiving 75 per cent of the votes present thereat, either 
in person or by proxy, shall be binding on all the parties hereto, 
excepting as to a change in percentages as aforesaid: 

The Board of Control shall be required to call a meeting 
of the parties hereto when requested so to do in writing, signed 
by any three of the contracting parties, but such request and 
such notice shall state the object for which such meeting is called. 

It shall be the duty of the Board of Control to have a proper 
record kept of all the returns made to it, with power from time 
to time to change the form of return as they may deem expedient. 

The Board of Control shall have authority to levy an assess- 



560 SUPPLEMENTARY FORMS 

ment, pro rata to the allotted tonnage, to defray the actual ex- 
penses made necessary to carry out this agreement. 

It is further agreed, that we will, respectively, immediately 
make return to the Board of Control of all rails of 50 pounds 
to the yard and upward which we are now under contract to 
deliver during the year 1888, said return to state to whom such 
rails are sold and when they are to be delivered. 
(Signatures) 



FORM 59 

STANDARD OIL TRUST AGREEMENT AND SUPPLE- 
MENTAL TRUST AGREEMENT OF 1882 i 

This agreement, made and entered upon this second day of 
January, a.d. 1882, by and between all the persons who shall 
now or may hereafter execute the same as parties thereto, 
witnesseth : 

I. It is intended that the parties to this agreement shall em- 
brace three classes, to wit: 

(1) All the stockholders and members of the following cor- 
porations and limited partnerships, to wit: 

Acme Oil Co. (New York), Acme Oil Co. (Pennsylvania), 
Atlantic Refining Co., of Phila.; Bush & Co., Limited, Camden 
Consohdated Oil Co., EUzabethport Acid Works, Imperial Re- 
fining Co., Limited, Chas. Pratt & Co., Paine, Ablett & Co., 
Limited, Standard Oil Co. (Ohio), Standard Oil Co. (Pittsburgh), 
Smith's Ferry Oil Trans. Co., Solar Oil Co., Limited, Sone & 
Fleming Mfg. Co., Limited. 

Also all the stockholders and members of such other corpora- 
tions and limited partnerships as may hereafter join in this 
agreement at the request of the trustees herein provided for. 

(2) The following individuals, to wit: 

W. C. Andrews, John D. Archbold, Lide K. Arter, J. A. 
Bostwick, Benj. Brewster, D. Bushnell, Thomas C. Bushnell. 
J. N. Camden, Henry L. Davis, H. M. Flagler, Mrs. H. M. 
Flagler, H. M. Hanna, and George W. Chapin, D. M. Harkness, 

1 Appendix. Report of Industrial Commission, Vol. 1, pp. 1221- 
26. 



COMBINATION ORGANIZATION FORMS 561 

D. M. Harkness, trustee; S. V. Harkness, John Huntington, H. A. 
Hutchins, Chas. F. G. Heye, 0. B. Jennings, Chas. Lockhart, 
A. M. McGregor, Wm. M. Macy, Wm. H. Macy, Jr., estate of 
Josiah Macy, Jr., Wm. H. Macy, Jr., executor; 0. H. Payne, 0. H. 
Payne, trustee; Chas. Pratt, Horace A. Pratt, C. M. Pratt, A. J. 
Pouch, John D. Rockefeller, Wm. Rockefeller, Henry H. Rogers, 
W. P. Thompson, J. J. Vandergrift, Wm. T. Wardwall, W. G. 
Warden, Josiah L. Warden; Warden, Frew & Co., Louise C. 
Wheaton, Julia H. York, George H. Vilas, M. R. Keith, Geo. F. 
Chester, trustees. 

Also all such individuals as may hereafter join in this agree- 
ment at the request of the trustees herein provided for. 

(3) A portion of the stockholders and members of the follow- 
ing corporations and limited partnerships, to wit : 

American Lubricating Oil Co., Baltimore United Oil Co., 
Beacon Oil Co., Bush & Denslow Manuf'g Co., Central Refining 
Co., of Pittsburgh; Chesbrough Manuf'g Co., Chess-Carley Co., 
Consolidated Tank Line Co., Inland Oil Co., Keystone Refining 
Co., Maverick Oil Co., National Transit Co., Portland Kerosene 
Oil Co., Producers' Con'd Land and Petroleum Co., Signal Oil 
Works, Limited, Thompson and Bedford Co., Limited, Devoe 
Manuf'g Co., EcHpse Lubricating Oil Co., Limited, Empire Re- 
fining Co., Limited, Franklin Pipe Co., Limited, Galena Oil 
Works, Limited, Galena Farm Oil Co., Limited, Germania Mining 
Co., Vacuum Oil Co., H. C. Van Tine & Co., Limited, Waters- 
Pierce Oil Co. 

Also stockholders and members (not being all thereof) of other 
corporations and limited partnerships who may hereafter join 
in this agreement at the request of the trustees herein provided 
for. 

II. The parties hereto do covenant and agree to and with each 
other, each in consideration of the mutual covenants and agree- 
ments of the others, as follows: 

(1) As soon as practicable a corporation shall be formed in 
each of the following States, under the laws thereof, to wit: 
Ohio, New York, Pennsylvania and New Jersey; Provided, how- 
ever, that instead of organizing a new corporation, any existing 
charter and organization may be used for the purpose when it 
can advantageously be done, 



562 SUPPLEMENTARY FORMS 

(2) The purposes and powers of said corporations shall be to 
mine for, produce, manufacture, refine, and deal in petroleum and 
all its products, and all the materials used in such business, and 
transact other business collateral thereto. But other purposes 
and powers shall be embraced in the several charters such as 
shall seem expedient to the parties procuring the charter, or, if 
necessary to comply with the law, the powers aforesaid may be 
restricted and reduced. 

(3) At any time hereafter, when it may seem advisable to the 
trustees herein provided for, similar corporations may be formed 
in other States and Territories. 

(4) Each of said corporations shall be known as the Standard 

Oil Co. of (and here shall follow the name 

of the State or Territory by virtue of the laws of which said 
corporation is organized). 

(5) The capital stock of each of said corporations shall be 
fixed at such an amount as may seem necessary and advisable to 
the parties organizing the same, in view of the purpose to be 
accomplished. 

(6) The shares of stock of each of said corporations shall be 
issued only for money, property, or assets equal at a fair valua- 
tion to the par value of the stock delivered therefor. 

(7) All of the property, real and personal, assets, and business 
of each and all of the corporations and limited partnerships 
mentioned or embraced in class (1) shall be transferred to and 
vested in the said several Standard Oil companies. All of the 
property, assets, and business in or of each particular State 
shall be transferred, to and vested in the Standard Oil Co. of that 
particular State, and in order to accompHsh such purposes the 
directors and managers of each and all of the several corpora- 
tions and limited partnerships mentioned in class first are hereby 
authorized and directed by the stockholders and members thereof 
(all of them being parties to this agreement) to sell, assign, 
transfer, convey, and make over, for the consideration hereinafter 
mentioned, to the Standard Oil Co., or companies of the proper 
State or States, as soon as said corporations are organized and 
ready to receive the same, all the property, real and personal, 
assets, and business of said corporations and limited partnerships. 



COMBINATION ORGANIZATION • FORMS 563 

Correct schedules of such property, assets, and business shall 
accompany each transfer. 

(8) The individuals embraced in class second of this agree- 
ment do each for himself agree, for the consideration hereinafter 
mentioned, to sell, assign, transfer, convey, and set over all the 
property, real and personal, assets, and business mentioned and 
embraced in schedules accompanying such sale and transfer to 
the Standard Oil Company or Companies of the proper State or 
States, as soon as the said corporations are organized and ready 
to receive the same. 

(9) The parties embraced in class third of this agreement do 
covenant and agree to assign and transfer all of the stock held by 
them in the corporations or limited partnerships herein named, 
to the trustees herein provided for, for the consideration and 
upon the terms hereinafter set forth. It is understood and 
agreed that the said trustees and their successors may hereafter 
take the assignment of stocks in the same or similar companies 
upon the terms herein provided, and that whenever and as 
often as all the stocks of any corporation and limited partnership 
are vested in said trustees the proper steps may then be taken 
to have all the money, property, real and personal, of said 
corporation or partnership assigned and conveyed to the Stand- 
ard Oil Company of the proper State on the terms and in the 
mode herein set forth, in which event the trustees shall receive 
stocks of the Standard Oil Company equal to the value of the 
money, property, and business assigned, to be held in place of the 
stocks of the company or companies assigning such property. 

(10) The consideration for the transfer and conveyance of the 
money, property, and business aforesaid to each of any of the 
Standard Oil Companies shall be stock of the respective Standard 
Oil Company to which said transfer or conveyance is made, 
equal at par value to the appraised value of the money, property, 
and business so transferred. Said stock shall be delivered to 
the trustees hereinafter provided for, and their successors, and 
no stock of any of said companies shall ever be issued except 
for money, property, or business equal at least to the par value 
of the stock so issued, nor shall any stock be issued by any of 
said companies for any purpose except to the trustees herein 



564 SUPPLEMENTARY FORMS 

provided for, to be held subject to the trusts hereinafter specified. 
It is understood, however, that this provision is not intended 
to restrict the purchase, sale, and exchange of property of said 
Standard Oil Companies as fully as they may be authorized to do 
by their respective charters, provided only that no stock be 
issued therefor except to said trustees. 

(11) The consideration for any stock delivered to said trustees 
as above provided for, as well as for stocks delivered to said 
trustees by persons mentioned or included in class third of this 
agreement, shall be the delivery by said trustees, to the persons 
entitled thereto, of trust certificates hereinafter provided for, 
equal at par value to the par value of the stocks of the said 
Standard Oil companies so received by said trustees, and equal 
to the appraised value of the stocks of other companies or 
partnerships delivered to said trustees. (The said appraised 
value shall be determined in a manner agreed upon by the parties 
in interest and said trustees). It is understood and agreed, 
however, that the said trustees may, with any trust funds in 
their hands, in addition to the mode above provided, purchase 
the bonds and stocks of other companies engaged in business 
similar or collateral to the business of said Standard Oil com- 
panies, on such terms and in such mode as they may deem ad- 
visable, and shall hold the same for the benefit of the owners 
of said trust certificates, and may sell, assign, transfer, and pledge 
such bonds and stocks whenever they may deem it advantageous 
to said trust so to do. 

III. The trusts upon which said stocks shall be held, and the 
number, powers, and duties of said trustees, shall be as follows: 

(1) The number of trustees shall be nine. 

(2) J. D. Rockefeller, 0. H. Payne, and Wm. Rockefeller 
are hereby appointed trustees, to hold their office until the first 
Wednesday of April, a.d. 1885. 

(3) J. A. Bostwick, H. M. Flagler, and W. G. Warden are 
hereby appointed trustees, to hold their office until the first 
Wednesday of April, a.d. 1884. 

(4) Chas. Pratt, Benj. Brewster, and John D. Archbold, are 
hereby appointed trustees, to hold office until the first Wednesday 
of April, A.D. 1883. 



COMBINATION ORGANIZATION FORMS 565 

(5) Elections for trustees to succeed those herein appointed 
shall be held annually, at which election a sufficient number of 
trustees shall be elected to fill all vacancies occurring either from 
expiration of the term of office of trustees or from any other 
cause. All trustees shall be elected to hold their office for three 
years, except those elected to fill a vacancy arising from any 
cause except expiration of term, who shall be elected for the 
balance of the term of the trustee whose place they are elected 
to fill. Every trustee shall hold his office until his successor is 
elected. 

(6) Trustees shall be elected by ballot by the owners of trust 
certificates or their proxies. At all meetings the owners of trust 
certificates who may be registered as such on the books of the 
trustees may vote in person or by proxy, and shall have one 
vote for each and every share of trust certificates standing in 
their names; but no such owner shall be entitled to vote upon any 
share which has not stood in his name thirty days prior to the 
day appointed for the election. The transfer books may be 
closed for thirty days immediately preceding the annual election. 
A majority of the shares represented at such election shall elect. 

(7) The annual meeting of the owners of said trust certifi- 
cates for the election of trustees and for other business shall be 
held at the office of the trustees in the city of New York on the 
first Wednesday of April of each year, unless the place of meeting 
be changed by the trustees, and said meeting may be adjourned 
from day to day until its business is completed. Special meetings 
of the onwers of said trust certificates may be called by the 
majority of the trustees at such times and places as they may 
appoint. It shall also be the duty of the trustees to call a special 
meeting of holders of trust certificates whenever requested to do 
so by a petition signed by the holders of 10 per cent in value of 
such certificates. The business of such special meetings shall be 
confined to the object specified in the notice given therefor. 
Notice of the time and place of all meetings of the owners of 
trust certificates shall be given by personal notice as far as pos- 
sible and by public notice in one of the principal newspapers in 
each State in which a Standard Oil Co. exists at least ten days 
before such meeting. At any meeting a majority in the value of 



566 SUPPLEMENTARY FORMS 

the holders of trust certificates represented consenting thereto, 
by-laws may be made, amended, or repealed relative to the mode 
of election of trustees and other business of the holders of trust 
certificates; provided, however, that said by-laws shall be in 
conformity with this agreement. By-laws may also be made, 
amended, and repealed at any meeting, by and with the consent 
of a majority in value of the holders of trust certificates, which 
alter this agreement relative to the number, powers, and duties 
of the trustees and to other matters tending to the more efficient 
accomplishment of the objects for which the trust is created, 
provided only that the essential intents and purposes of this 
agreement be not thereby changed. 

(8) Whenever a vacancy occurs in the board of trustees 
more than sixty days prior to the annual meeting for the election 
of trustees, it shall be the duty of the remaining trustees to call 
a meeting of the owners of the Standard Oil Trust certificates 
for the purpose of electing a trustee or trustees to fill the vacancy 
or vacancies. If any vacancy occurs in the board of trustees, 
from any cause, within sixty days of the date of the annual 
meeting for the election of trustees, the vacancy may be filled 
by a majority of the remaining trustees, or, at their option, may 
remain vacant until the annual election. 

(9) If, for any reason, at any time, a trustee or trustees 
shall be appointed by any court to fill any vacancy or vacancies 
in said board of trustees, the trustee or trustees so appointed 
shall hold his or their respective office or offices only until a 
successor or successors shall be elected in the manner above 
provided for. 

(10) Whenever any change shall occur in the board of trustees, 
the legal title to the stock and other property held in trust shall 
pass to and vest in the successors of said trustees without formal 
transfer thereof; but if any time such formal transfer shall be 
deemed necessary or advisable it shall be the duty of the board 
of trustees to obtain the same, and it shall be the duty of any 
retiring trustee, or the administrator or executor of any deceased 
trustee, to make said transfer. 

(11) The trustees shall prepare certificates which shall show 
the interest of each beneficiary in said trust, and deliver them 



COMBINATION ORGANIZATION FORMS 567 

to the persons properly entitled thereto. They shall be divided 
into shares of the par value of $100 each, and shall be known 
as " Standard Oil Trust certificates," and shall be issued sub- 
ject to all the terms and conditions of this agreement. The 
trustees shall have power to agree upon and direct the form and 
contents of said certificates, and the mode in which they shall 
be signed, attested and transferred. The certificates shall contain 
an express stipulation that the holders thereof shall be bound by 
the terms of this agreement, and by the by-laws herein provided 
for. 

(12) No certificates shall be issued except for stocks and 
bonds held in trust, as herein provided for, and the par value of 
certificates issued by said trustees shall be equal to the par value 
of the stocks of said Standard Oil Companies, and the appraised 
value of other bonds and stocks held in trust. The various bonds, 
stocks, and moneys held under said trust shall be held for all 
parties in interest jointly, and the trust certificates so issued shall 
be the evidence of the interest held by the several parties in 
this trust. No dupHcate certificates shall be issued by the trustees 
except upon the surrender of the original certificate or certificates 
for cancellation, or upon satisfactory proof of the loss thereof, 
and in the latter case they shall require a sufficient bond of 
indemnity. 

(13) The stocks of the various Standard Oil Companies held 
in trust by) said trustees shall not be sold, assigned, or transferred 
by said trustees, or by the beneficiaries, or by both combined, 
so long as the trust endures. The stocks and bonds of other 
corporations held by said trustees may be by them exchanged 
or sold and the proceeds thereof distributed pro rata to the 
holders of trust certificates, or said proceeds may be held and re- 
invested by said trustees for the purposes and uses of the trust; 
provided, however, that said trustees may from time to time 
assign such shares of stock of said Standard Oil Companies as may 
be necessary to quahfy any person or persons chosen or to be 
chosen as directors and officers of any of said Standard Oil 
Companies. 

(14) It shall be the duty of said trustees to receive and safely 
to keep all interest and dividends declared and paid upon any of 



568 SUPPLEMENTARY FORMS 

the said bonds, stocks, and moneys held by them in trust, and to 
distribute all moneys received from such sources or from sales of 
trust property or otherwise by declaring and paying dividends 
upon the Standard Trust certificates as funds accumulate, which 
in their judgment are not needed for the uses and expenses of 
said trust. The trustees shall, however, keep separate accounts 
and receipts from interest and dividends, and of receipts from 
sales or transfers of trust property, and in making any distribu- 
tion of trust funds, in which moneys derived from sales or trans- 
fers shall be included, shall render the holders of trust certificates 
a statement showing what amount of the fund distributed has 
been derived from such sales or transfers. The said trustees may 
be also authorized and empowered by a vote of a majority in 
value of holders of trust certificates, whenever stocks or bonds 
have accumulated in their hands from money purchases thereof, 
or the stocks and bonds held by them have increased in value, 
or stock dividends shall have been declared by any of the 
companies whose stocks are held by said trustees, or when- 
ever from any such cause it is deemed advisable so to do, to 
increase the amount of trust certificates to the extent of such 
increase or accumulation of values and to divide the same among 
the persons then owning trust certificates pro rata. 

(15) It shall be the duty of said trustees to exercise general 
supervision over the affairs of said several Standard Oil Com- 
panies, and as far as practicable over the other companies or 
partnerships, any portion of whose stock is held in said trust. 
It shall be their duty as stockholders of said companies to elect 
as directors and officers thereof faithful and competent men. 
They may elect themselves to such positions when they see fit 
so to do, and shall endeavor to have the affairs of said companies 
managed and directed in the manner they may deem most con- 
ducive to the best interests of the holders of said trust certificates. 

(16) All the powers of the trustees may be exercised by a 
majority of their number. They may appoint from their own 
number an executive and other committees. A majority of each 
committee shall exercise all the powers which the trustees may 
confer upon such committee. 

(17) The trustees may employ and pay aU such agents and 



COMBINATION ORGANIZATION FORMS 569 

attorneys as they may deem necessary in the management of 
said trust. 

(18) Each trustee shall be entitled to a salary for his services 
not exceeding twenty-five thousand dollars per annum, except 
the president of the board, who may be voted a salary not ex- 
ceeding thirty thousand dollars per annum, which salaries shall 
be fixed by said board of trustees. All salaries and expenses 
connected with or growing out of the trust shall be paid by the 
trustees from the trust fund. 

(19) The board of trustees shall have its principal office in 
the city of New York, unless changed by vote of the trustees, 
at which office, or in some place of safe deposit in said city, 
the bonds and stocks shall be kept. The trustees shall have 
power to adopt rules and regulations pertaining to the meetings 
of the board, the election of officers, and the management of the 
trust. 

(20) The trustees shall render at each annual meeting a state- 
ment of the affairs of the trust. If a termination of the trust 
be agreed upon, as hereinafter provided, or within a reasonable 
time prior to its termination by lapse of time, the trustees shall 
furnish to the holders of the trust certificates a true and perfect 
inventory and appraisement of all stocks and other property 
held in trust, and a statement of the financial affairs of the 
various companies whose stocks are held in trust. 

(21) The trust shall continue during the lives of the survivors 
and survivor of the trustees in this agreement named, and for 
twenty-one years thereafter; provided, however, that if at any 
time after the expiration of ten years two-thirds of all the holders 
in value, or if after the expiration of one year 90 per cent of all 
the holders in value of trust certificates shall, at a meeting of 
holders of trust certificates called for that purpose, vote to ter- 
minate this trust at some time to be by them then and there! 
fixed, the said trust shall terminate at the date so fixed. If the 
holders of trust certificates shall vote to terminate the trust as 
aforesaid, they may, at the same meeting, or at a subsequent 
meeting called for that purpose, decide by vote of two-thirds in 
value of their number the mode in which the affairs of the trust 
shall be wound up, and whether the trust property shall be 



570 SUPPLEMENTARY FORMS 

distributed or whether part, and if so, what part shall be divided 
and what part sold, and whether such sales shall be public or 
private. The trustees, who shall continue to hold their office 
for that purpose, shall make the distribution in the mode directed, 
or, if no mode be agreed upon, by two-thirds in value as aforesaid, 
the trustees shall make distribution of the trust property accord- 
ing to law. But said distribution, however made, and whether 
it be of property, or values, or of both shall be just and equi- 
table, and such as to insure to each owner of a trust certificate 
his due proportion of the trust property of the value thereof. 

(22) If the trust shall be terminated by the expiration of the 
time for which it is created, the distribution of the trust prop- 
erty shall be directed and made in the mode above provided. 

(23) This agreement, together with the registry of certificates, 
book of accounts, and other books and papers connected with 
the businesss of said trust, shall be safely kept at the principal 
office of said trustees. 

(Signatures). 

Supplemental Agreement 

WHEREAS in and by agreement dated January 2, 1882, and 
known as the Standard Trust agreement, the parties thereto did 
mutually covenant and agree, inter alia, as follows, to wit: That 
corporations to be known as Standard Oil Companies of various 
States should be formed, and that all of the property, real and 
personal assets, and business of each and all of the corporations 
and limited partnerships mentioned or embraced in class first 
of said agreement should be transferred and vested in the 
said several Standard Oil Companies; that all of the property, 
assets, and business in or of each particular State should be 
transferred to and vested in the Standard Oil Company of that 
particular State, and the directors and managers of each and all 
of the several corporations and associations mentioned in class 
first were authorized and directed to sell, assign, transfer, and 
convey, and to make over to the Standard Oil Company or Com- 
panies of the proper State or States, as soon as said corporations 
were organized and ready to receive the same, all of the property, 
real and personal, assets and business of said corporations or 



COMBINATION ORGANIZATION FORMS 571 

associations; and whereas it is not deemed expedient that all of 
the companies and associations mentioned should transfer their 
property to the said Standard Oil Companies at the present time, 
and in case of some companies and associations it may never be 
deemed expedient that the said transfer should be made, and 
said companies and associations go out of existence; and 
whereas it is deemed advisable that a discretionary power should 
be vested in the trustees as to when such transfer or transfers 
should take place, if at all: Now, it is hereby mutually agreed 
between the parties to the said trust agreement, and as supple- 
mentary thereto, that the trustees named in the said agreem nt 
and their successors shall have the power and authority to decide 
what companies shall convey their property as in said agree- 
ment contemplated, and when the said sales and transfers shall 
take place, if at all, and until said trustees shall so decide, each 
of said companies shall remain in existence, and retain its 
property and business, and the trustees shall hold the stocks 
thereof in trust, as in said agreement provided. In the exercise 
of said discretion the trustees shall act by a majority of their 
number as provided in said trust agreement. All portions of said 
trust agreement relating to this subject shall be considered so 
changed as to be in harmony with this supplemental agreement. 

In witness whereof, the said parties have subscribed this agree- 
ment this 4th day of January, 1882. 

(Duly signed by the same parties). 



FORM 60 
DIRECTORS' RESOLUTION FOR CONSOLIDATION i 

Whereas, It is the sense of this board that the consolidation of 
the A. Company, the B. Company and the C. Company to form 
a single corporation, and the consohdation and amalgamation of 
their respective capital stocks, properties and franchises will be 
mutually advantageous, and 

Whereas, The holders of more than three-fourths in value of 
all the capital stock of each of said companies have consented in 

1 From Wood, Modern Business Corporations. 



572 SUPPLEMENTARY FORMS 

writing to a consolidation of the said A. Company, B. Company 
and C. Company upon the terms following, to wit: 

First. That said consolidation shall take place at once, and 
the consohdated corporation shall continue in existence for fifty 
years. 

Second. That the consolidated corporation shall bear the 
name of the A. Company. 

Third. That the consolidated corporation shall take over and 
become the owner of all the lands, properties, franchises and 
assets of every description belonging to each of said constituent 
companies; shall assume, become liable for, pay and discharge, 
all valid debts, liabilities and obligations of every kind, character 
and description, heretofore incurred or entered into by either and 
all of said constituent companies; shall hold said property and 
franchises subject to all the valid conditions, liens and claims to 
which the same were and are subject in the hands of the several 
constituent companies; and shall assume, undertake and per- 
form all contracts, agreements and undertakings to which any 
and all of said constituent companies are lawfully bound to the 
same extent in like manner as such constituent company or 
companies are bound to keep and perform the same. 

Fourth. That the objects and purposes of the consolidated 
company shall be made to embrace the objects and purposes of 
all the three constituent corporations. 

Fifth. That the consolidated company shall have a board of 
directors equal in number to the combined boards of the three 
constituent companies, and its directors for the first year shall 
be all the directors of all of said companies. 

Sixth. That its principal place of business shall be that of the 
A. Company. 

Seventh. That the capital stock of said consohdated com- 
pany shall consist of one hundred thousand (100,000) shares of 
one hundred dollars ($100) each, and shall be issued to share- 
holders in the constituent companies (upon surrender of their 
shares of stock therein) in the proportion that such shares held 
by them respectively shall bear to the combined capital stocks of 
all the said constituent companies. 

Be it resolved, that the propositions and conditions above re- 
cited are hereby accepted and adopted by the board of direc- 
tors of the Company. 



COMBINATION ORGANIZATION FORMS 573 



FORM 61 

STOCKHOLDERS' RESOLUTION AUTHORIZING 
CONSOLIDATION 

Whereas, A. consolidation of the A. Company, the B. Com- 
pany and the C. Company under the name of the A Company, 
has been proposed on terms and conditions set forth in an agree- 
ment entered into on the day of , 19 , be- 
tween the Directors of said corporations and heretofore sub- 
mitted to the stockholders of this Company; and 

Whereas, Said proposed consolidation meets with the ap- 
proval of the stockholders of this Corporation: 

Now, Therefore, Be It Resolved, That the Board of Directors 
of this Company be and hereby is fully authorized, empowered, 
and instructed to take all such steps as may be necessary or 
desirable to carry said consolidation into effect in accordance 
with the terms of said agreement between the Directors of the 
three aforementioned corporations. 



FORM 62 . 
CHARTER OF AN INDUSTRIAL CONTROL COMPANY 

AMENDED CERTIFICATE OF INCORPORATION 
OF UNITED STATES STEEL CORPORATION 

We, the undersigned, in order to form a corporation for the 
purposes hereinafter stated, under and pursuant to the pro- 
visions of the Act of the Legislature of the State of New Jersey, 
entitled "An Act concerning corporations (Revision of 1896)," 
and the acts amendatory thereof and supplemental thereto, do 
hereby certify as follows: 

I. The name of the corporation is 

United States Steel Corporation 

II. The location of its principal office in the State of New 
Jersej/ is at No. 51 Newark Street, in the City of Hoboken, 



574 SUPPLEMENTARY FORMS 

County of Hudson. The name of the agent therein and in charge 
thereof, upon whom process against the corporation may be 
served, is Hudson Trust Company. Said office is to be the regis- 
tered office of said corporation. 

in. The objects for which the corporation is formed are: 

To manufacture iron, steel, manganese, coke, copper, lumber 
and other materials, and all or any articles consisting, or partly 
consisting, of iron, steel, copper, wood or other materials, and 
all or any products thereof. 

To acquire, own, lease, occupy, use or develop any lands con- 
taining coal or iron, manganese, stone or other ores, or oil, and 
any wood lands, or other lands for any purpose of the Company. 

To mine, or otherwise to extract or remove, coal, ores, stone, 
and other minerals and timber from any lands owned, acquired, 
leased, or occupied by the Company, or from any other lands. 

To buy and sell, or otherwise to deal or to traffic in, iron, steel, 
manganese, copper, stone, ores, coal, coke, wood, lumber and 
other materials, and any of the products thereof, and any articles 
consisting, or partly consisting thereof. 

To construct bridges, buildings, machinery, ships, boats, 
engines, cars and other equipment, railroads, docks, slips, eleva- 
tors, water works, gas works and electric works, viaducts, 
aqueducts, canals and other water-ways, and any other means 
of transportation, and to sell the same, or otherwise to dispose 
thereof, or to maintain and operate the same, except that the 
Company shall not maintain or operate any railroad or canal in 
the State of New Jersey. 

To apply for, obtain, register, purchase, lease, or otherwise 
to acquire, and to hold, use, own, operate and introduce, and to 
sell, assign, or otherwise to dispose of, any trade-marks, trade- 
names, patents, inventions, improvements and processes used in 
connection with, or secured under letters patent of the United 
States, or elsewhere, or otherwise; and to use, exercise, develop, 
grant licenses in respect of, or otherwise to turn to account any 
such trade-marks, patents, licenses, processes, and the like, or 
any such property or rights. 

To engage in any other manufacturing, mining, construction 
or transportation business of any kind or character whatsoever, 



COMBINATION ORGANIZATION FORMS 575 

and to that end to a squire, hold, own and dispose of any and 
all property, assets, stocks, bonds and rights of any and every 
kind; but not to engage in any business hereunder which shall 
require the exercise of the right of eminent domain within the 
State of New Jersey. 

To acquire by purchase, subscription or otherwise, and to 
hold or to dispose of, stocks, bonds or any other obhgations of 
any corporation formed for, or then or theretofore engaged in 
or pursuing, any one or more of the kinds of business, purposes, 
objects or operations above indicated, or owning or holding any 
property of any kind herein mentioned; or of any corporation 
owning or holding the stocks or the obligations of any such 
corporation. 

To hold for investment, or otherwise to use, sell or dispose of, 
any stock, bonds, or other obligations of any such other cor- 
poration; to aid in any manner any corporation whose stock, 
bonds or other obhgations are held or are in any manner guaran- 
teed by the Company, and to do any other acts or things for 
the preservation, protection, improvement or enhancement of 
the value of any such stock, bonds or other obligations, or to do 
any acts or things designated for any such purpose; and, while 
owner of any such stock, bonds or other obligation, to exercise all 
the rights, powers and privileges of ownership thereof, and to 
exercise any and all voting power thereon. 

The business or purpose of the Company is from time to 
time to do any one or more of the acts and things herein set 
forth; and it may conduct its business in other States and in the 
Territories and in foreign countries, and may have one office or 
more than one office, and keep the books of the Company out- 
side of the State of New Jersey, except as otherwise may be 
provided by law; and may hold, purchase, mortgage and convey 
real and personal property either in or out of the State of New 
Jersey. 

Without in any particular limiting any of the objects and 
powers of the corporation, it is hereby expressly declared and 
provided that the corporation shall have power to issue bonds 
and other obligations, in payment for property purchased or ac- 
quired by it, or for any object in or about its business; to 



576 SUPPLEMENTARY FORMS 

mortgage or pledge any stocks, bonds or other obligations, or 
any property which may be acquired by it, to secure any bonds 
or other obligations by it issued or incurred; to guarantee any 
dividends or bonds or contracts or other obligations; to make and 
perform contracts of any kind and description; and in carrying 
on its business, or for the purpose of attaining or furthering any 
of its objects, to do any and all other acts and things, and to 
exercise any and all other powers which a copartnership or 
natural person could do and exercise, and which now or here- 
after may be authorized by law. 

IV. The total authorized capital stock of the corporation is 
eleven hundred milhon dollars ($1,100,000,000), divided into 
eleven miUion shares of the par value of one hundred dollars 
each. Of such total authorized capital stock, five million five 
hundred thousand shares, amounting to five hundred and fifty 
million dollars, shall be preferred stock, and five milhon five 
hundred thousand shares, amounting to five hundred and fifty 
milhon dollars, shall be common stock. 

From time to time, the preferred stock and the common stock 
may be increased according to law, and may be issued in such 
amounts and proportions as shall be determined by the board 
of directors, and as may be permitted by law. 

The holders of the preferred stock shall be entitled to receive 
when and as declared, from the surplus or net profits of the cor- 
poration, yearly dividends at the rate of seven per centum per 
annum, and no more, payable quarterly on dates to be fixed by 
the by-laws. The dividends on the preferred stock shall be cumu- 
lative, and shall be payable before any dividend on the common 
stock shall be paid or set apart: so that, if any year dividends 
amounting to seven per cent shall not have been paid thereon, 
the deficiency shall be payable before any dividends shall be 
paid upon or set apart for the common stock. 

Whenever all cumulative dividends on the preferred stock for 
all previous years shall have been declared and shall have be- 
come payable, and the accrued quarterly instalments for the 
current year shall have been declared, and the company shall 
have paid such cumulative dividends for previous years and 
such accrued quarterly instalments, or shall have set aside from 



COMBINATION ORGANIZATION FORMS 577 

its surplus or net profits a sum sufficient for the payment thereof, 
the Board of Directors may declare dividends on the common 
stock, payable then or thereafter, out of any remaining surplus 
or net profits. 

In the event of any liquidation or dissolution or winding up 
(whether voluntary or involuntary) of the corporation, the 
holders of the preferred stock shall be entitled to be paid in full 
both the par amount of their shares, and the unpaid dividends 
accrued thereon before any amount shall be paid to the holders 
of the common stock; and after the payment to the holders of 
the preferred stock of its par value, and the unpaid accrued divi- 
dends thereon, the remaining assets and funds shall be divided 
and paid to the holders of the common stock according to their 
respective shares. 

V. The names and post-office addresses of the incorporators, 
and the number of shares of stock for which severally and respec- 
tively we do hereby subscribe (the aggregate of our said subscrip- 
tions, being three thousand dollars, is the amount of capital stock 
with which the corporation will commence business, are as 
follows : 





Post office address 


Number of Shares 


Name 


Preferred 

stock 


Common 
stock 


Charles C. Cluff 

William J. Curtis 

Charles MacVeagh. . . . 


51 Newark Street, Ho- 

boken, New Jersey 

Ditto 

Ditto 


5 
5 
5 


5 
5 
5 



VI. The duration of the corporation shall be perpetual. 

Vn. The number of directors of the Company shall be fixed 
from time to time by the by-laws; but the number if fixed at 
more than three, shall be some multiple of three. The directors 
shall be classified with respect to the time for which they shall 
severally hold office by dividing them into three classes, each 
consisting of one-third of the whole number of the board of direc- 
tors. The directors of the first class shall be elected for a term 
of one year; the directors of the second class for a term of two 



578 SUPPLEMENTARY FORMS 

years; and the directors of the third class for a term of three 
years; and at each annual election the successors to the class of 
directors whose terms shall expire in that year shall be elected 
to hold office for the term of three years, so that the term of office 
of one class of directors shall expire in each year. 

The number of the directors may be increased as may be pro- 
vided in the by-laws. In case of any increase of the number of 
the directors the additional directors shall be elected as may be 
provided in the by-laws, by the Directors or by the stockholders 
at an annual or special meeting and one-third of their number 
shall be elected for the then unexpired portion of the term of 
the directors of the first class, one-third of their number for the 
unexpired portion of the term of the directors of the second 
class, and one-third of their number for the unexpired portion 
of the term of the directors of the third class, so that each class 
of directors shall be increased equally. 

In case of any vacancy in any class of directors through death, 
resignation, disquahfication or other cause, the remaining direc- 
tors, by affirmative vote of a majority of the Board of Directors, 
may elect a successor to hold office for the unexpired portion of 
the term of the director whose place shall be vacant, and until 
the election of a successor. 

The Board of Directors shall have power to hold their meet- 
ings outside of the State of New Jersey at such places as from 
time to time may be designated by the by-laws or by resolution 
of the Board. The by-laws may prescribe the number of direc- 
tors necessary to constitute a quorum of the Board of Directors, 
which number may be less than a majority of the whole number 
of the directors. 

Unless authorized by votes given in person or by proxy by 
stockholders holding at least two-thirds of the capital stock of 
the corporation, which is represented and voted upon in person 
or by proxy at a meeting specially called for that purpose or at 
an annual meeting, the Board of Directors shall not mortgage or 
pledge any of its real property, or any shares of the capital 
stock of any other corporation; but this prohibition shall not be 
construed to apply to the execution of any purchase-money 
mortgage or any other purchase-money lien. As authorized by 
the Act of the Legislature of the State of New Jersey passed 



COMBINATION ORGANIZATION FORMS 579 

March 22, 1901, amending the 17th section of the Act Concerning 
Corporations (Revision of 1896), any action which theretofore 
required the consent of the holders of two-thirds of the stock at 
any meeting after notice to them given, or required their consent 
in writing to be filed, may be taken upon the consent 
of, and the consent given and filed by the holders of two-thirds 
of the stock of each class represented at such meeting in per- 
son or by proxy. 

Any officer elected or appointed by the Board of Directors 
may be removed at any time by the affirmative vote of a raajority 
of the whole Board of Directors. Any other officer or employee 
of the Company may be removed at any time by vote of the 
Board of Directors, or by any committee or superior officer upon 
whom such power of removal may be conferred by the by-laws 
or by vote of the Board of Directors. 

The Board of Directors, by the affirmative vote of a majority 
of the whole board, may appoint from the directors an executive 
committee, of which a majority shall constitute a quorum; and 
to such extent as shall be provided in the by-laws, such committee 
shall have and may exercise all or any of the powers of the 
Board of Directors, including power to cause the seal of the 
corporation to be affixed to all papers that may require it. 

The Board of Directors, by the affirmative vote of a majority 
of the whole board, may appoint any other Standing Committees, 
and such Standing Committees shall have and may exercise such 
powers as shall be conferred or authorized by the by-laws. 

The Board of Directors may appoint not only other officers 
of the Company, but also one or more vice-presidents, one or 
more assistant treasurers and one or more assistant secretaries; 
and, to the extent provided in the by-laws, the persons so ap- 
pointed respectively shall have and may exercise all the powers 
of the president, of the treasurer, and of the secretary, 
respectively. 

The Board of Directors shall have power from time to time 
to fix and to determine and to vary the amount of the working 
capital of the Company; and to direct and determine the use 
and disposition of any surplus or net profits over and above 
the capital stock paid in; and in its discretion the Board of 
Directors may use and apply any such surplus or accumulated 



580 SUPPLEMENTARY FORMS 

profits in purchasing or acquiring its bonds or other obHgations, 
or shares of its own capital stock, to such extent and in such man- 
ner and upon such terms as the Board of Directors shall deem ex- 
pedient; but shares of such capital stock so purchased or ac- 
quired may be resold, unless such shares shall have been retired 
for the purpose of decreasing the Company's capital stock as pro- 
vided by law. 

The Board of Directors from time to time shall determine 
whether and to what extent, and at what times and places, and 
under what conditions and regulations,- the accounts and books of 
the corporation, or any of them, shall be open to the inspection 
of the Stockholders, and no Stockholder shall have any right to 
inspect any account or book or document of the corporation, 
except as conferred by Statute or authorized by the Board of 
Directors, or by a resolution of the Stockholders. 

Subject always to by-laws made by the Stockholders, the 
Board of Directors may make by-laws, and, from time to time, 
may alter, amend or repeal any by-laws; but any by-laws made 
by the Board of Directors may be altered or repealed by the 
Stockholders at any annual meeting, or at any special meeting, 
provided notice of such proposed alteration or repeal be included 
in the notice of the meeting. 

In witness whereof, we have hereunto set our hands and seals 
the 23rd day of February, 1901. 

Charles C. Cluff 
William J. Curtis 
Charles MacVeagh 
Signed, sealed and delivered > 

in the presence of ) 

Francis Lynde Stetson 
Victor Morawetz. 

State of New Jersey, ) gg. 
County of Hudson, ) 

Be it remembered that on this 23rd day of February, 1901, 
before the undersigned, personally appeared Charles C. Cluff, 
WiUiam J. Curtis and Charles MacVeagh, who, I am satisfied, 
are the persons named in and who executed the foregoing cer- 



COMBINATION ORGANIZATION FORMS 581 

tificate; and I having first made known to them, and to each of 
them, the contents thereof, they did each acknowledge that they 
signed, sealed and dehvered the same as their voluntary act and 

deed. 

Geo Holmes 

Master in Chancery of New Jersey. 
lOct. Internal Revenue Stamp Cancelled. 

Endorsed " Received in the Hudson Co , N. J., Clerk's Office, 
February 25th a.d. 1901, and Recorded in Clerk's Record 

No on page 

Maurice J. Stack 
Clerk. 
Endorsed "Filed Feb. 25, 1901. 

George Wurts 
Secretary of State. 



FORM 63 

CHARTER OF A PURE SECUR lES-HOLDING 
CORPORATION 

Certificate of Incorporation of Northern 
Securities Company^ 

State of New Jersey, ss: 

We, the undersigned, in order to form a corporation for the 
purposes hereinafter stated, under and pursuant to the provisions 
of the act of the legislature of the State of New Jersey entitled 
"An act concerning corporations" (revision of 1896), and the 
acts amendatory thereof and supplemental thereto, do hereby 
certify as follows: 

First. The name of the corporation is Northern Securities 
Company. 

Second. The location of its principal office in the State of 
New Jersey is at No. 51 Newark Street, in the city of Hoboken, 
county of Hudson. The name of the agent therein, and in charge 

1 Taken from Northern Securities Co. v. United States, 193 U. S. 
197, pp. 216-221. 



582 SUPPLEMENTARY EORMS 

thereof, upon whom process against the corporation may be 
served, is Hudson Trust Company. Such office is to be the 
registered office of the corporation. 
Third. The objects for which the corporation is formed are: 

(1) To acquire by purchase, subscription, or otherwise, and 
to hold as investment, any bonds of other securities or evidences 
of indebtedness, or any shares of capital stock created or issued 
by any other corporation or corporations, association or associa- 
tions, of the State of New Jersey, or of any other State, Terri- 
tory, or country. 

(2) To purchase, hold, sell, assign, transfer, mortgage, pledge, 
or otherwise dispose of any bonds or other securities or evidences 
of indebtedness created or issued by any other corporation or 
corporations, association or associations, of the State of New 
Jersey, or of any other State, Territory, or country, and while 
owner thereof to exercise all the rights, powers, and privileges of 
ownership. 

(3) To purchase, hold, sell, assign, transfer, mortgage, pledge, 
or otherwise dispose of shares of the capital stock of any other 
corporation or corporations, association or associations, of the 
State of New Jersey, or of any other State, Territory, or country, 
and while owner of such stock to exercise all the rights, powers, 
and privileges of ownership, including the right to vote thereon. 

(4) To aid in any manner any corporation or association of 
which any bonds or other securities or evidences of indebtedness 
or stock are held by the corporation, and to do any acts or 
things designed to protect, preserve, improve, or enhance the 
value of any such bonds or other securities or evidences of in- 
debtedness or stock. 

(5) To acquire, own and hold such real and personal property 
as may be necessary or convenient for the transaction of its 
business. 

The business or purpose of the corporation is from time to time 
to do any one or more of the acts and things herein set forth. 

The corporation shall have power to conduct its business in 
other States and in foreign countries, and to have one or more 
offices out of this State, and to hold, purchase, mortgage, and 
convey real personal property out of this State. 

Fourth. The total authorized capital stock of the corporation 



COMBINATION ORGANIZATION FORMS 583 

is four hundred million dollars ($400,000,000), divided into four 
million (4,000,000) shares ot the par value of one hundred dollars 
($100) each. The amount ot the capital stock with which the 
corporation will commence business is thirty thousand dollars. 

Fifth. The names and post-ofhce addresses of the incorporators, 
and the number of shares of stock subscribed for by each (the 
aggregate of such subscriptions being the amount of capital stock 
with which the company will commence business), are as 
follows : 

Name and post-office address Number of shares 

George F. Baker, Jr., 258 Madison avenue, New York, N. Y. 100 

Abram M. Hyatt, 214 Allen avenue, Allenhurst, N. Y. 100 

Richard Trimble, 53 East Twenty-fifth street, New York, N. Y. 100 

Sixth. The duration of the corporation shall be perpetual. 

Seventh. The number of directors of the corporation shall be 
fixed from time to time by the by-laws; but the number, if fixed 
at more than three, shall be some multiple of three. The direc- 
tors shall be classified with respect to the time for which they shall 
severally hold office by dividing them into three classes, each 
consisting of one-third of the whole number of the board of 
directors. The directors of the first class shall be elected for a 
term of one year, the directors of the second class for a tenm 
of two years, and the directors of the third class for a term of 
three years; and at each annual election the successors to the 
class of directors whose term shall expire in that year shall be 
elected to hold office for the term of three years, so that the 
term of office of one class of directors shall expire in each year. 

In case of any increase of the number of the directors the addi- 
tional directors shall be elected as may be provided in the by- 
laws, by the director or by the stockholders at an annual or 
special meeting, and one-third of their number shall be elected 
for the then unexpired portion of the term of the directors of 
the first class, one third of their number for the unexpired por- 
tion of the term of the directors of the second class, and one- 
third of their number for the unexpired portion of the term of the 
directors of the third class, so that each class of directors shall 
be increased equally. 



584 SUPPLEMENTARY FORMS 

In case of any vacancy in any class of directors through death, 
resignation, disqualification, or other cause, the remaining direc- 
tors, by affirmative vote of a majority of the board of directors, 
may elect a successor to hold office for the unexpired portion of 
the term of the director whose place shall be vacant, and until 
the election of a successor. 

The board of directors shall have power to hold their meet- 
ings outside the State of New Jersey at such places as from time 
to time may be designated by the by-laws, or by resolution of the 
board. The by-laws may prescribe the number of directors 
necessary to constitute a quorum of the board of directors, which 
number may be less than a majority of the whole number of the 
directors. 

As authorized by the act of the legislature of the State of New 
Jersey passed March 22, 1901, amending the seventeenth section 
of the act concerning corporations (revision of 1896), any action 
which theretofore required the consent of the holders of two- 
thirds of the stock at any meeting after notice to them given, or 
required their consent in writing to be filed, may be taken upon 
the consent of, and the consent given and filed by, the holders of 
two-thirds of the stock of each class represented at such meeting 
in person or by proxy. 

Any officer elected or appointed by the board of directors may 
be removed at any time by the affirmative vote of a majority of 
the whole board of directors. Any other officer or employee of 
the corporation may be removed at any time by vote of the 
board of directors, or by any committee or superior officer upon 
whom such power of removal may be conferred by the by-laws or 
by vote of the board of directors. 

The board of directors, by the affirmative vote of a majority 
of the whole board, may appoint from the directors an executive 
committee, of which a majority shall constitute a quorum, and 
to such extent as shall be provided in the by-laws such committee 
shall have and may exercise all or any of the powers of the board 
of directors, including power to cause the seal of the corporation to 
be affixed to all papers that may require it. 

The board of directors may appoint one or more vice-presi- 
dents, one or more assistant treasurers, and one or more assistant 
secretaries, and, to the extent provided in the by-laws, the persons 



COMBINATION ORGANIZATION FORMS 585 

so appointed, respectively, shall have and may exercise all the 
powers of the president, of the treasurer, and of the secretary 
respectively. 

The board of directors shall have power from time to time to 
fix and determine and to vary the amount of the working capital 
of the corporation; to determine whether any, and if any, what 
part of any accumulated profits shall be declared in dividends 
and paid to the stockholders; to determine the time or times for 
the declaration and payment of dividends, and to direct and to 
determine the use and disposition of any surplus or net profits 
over and above the capital stock paid in; and in its discretion 
the board of directors may use and apply any such surplus or 
accumulated profits in purchasing or acquiring its bonds or other 
obUgations, or shares of the capital stock of the corporation to 
such extent and in such manner and upon such terms as the board 
of directors shall deem expedient; but shares of such capital stock 
so purchased or acquired may be resold, unless such shares 
shall have been retired for the purpose of decreasing the capital 
stock of the corporation to the extent authorized by law. 

The board of directors, from time to time shall determine 
whether and to what extent, and at what times and places and 
under what conditions and regulations, the accounts and books 
of the corporation, or any of them, shall be open to the inspec- 
tion of the stockholders, and no stockholders shall have any right 
to inspect any account or book or document of the corporation 
except as conferred by statute of the State of New Jersey, or 
authorized by the board of directors or by a resolution of the 
stockholders. 

The board of directors may make by-laws, and from time to 
time may alter, amend, or repeal any by-laws; but any by-laws 
made by the board of directors may be altered or repealed by the 
stockholders at any annual meeting or at any special meeting, 
provided notice of such proposed alteration or repeal be included 
in the notice of the meeting. 

In witness whereof we have hereunto set our hands and seals 
the 12th day of November, 1901. 

Signed, sealed and acknowledged by Geo. F. Baker, Jr., Abram 
M. Hyatt and Richard Trimble. 



586 SUPPLEMENTARY FORMS 



D. SPECIMENS OF REGULATORY LAWS 

FORM 64 
SHERMAN ANTI-TRUST ACT 

An act to protect trade and commerce against unlawful re- 
straints and monopolies, approved July 2, 1890. 26 Stat, at 
L. 209. 

Section 1. Every contract, combination in the form of trust 
or otherwise, or conspiracy, in restraint of trade or commerce 
among the several states, or with foreign nations, is hereby de- 
clared to be illegal. Every person who shall make any such con- 
tract or engage in any such combination or conspiracy shall 
be deemed guilty of a misdemeanor, and, on conviction thereof, 
shall be punished by fine not exceeding five thousand dollars, 
or by imprisonment not exceeding one year, or by both said 
punishments, in the discretion of the court. 

Section 2. Every person who shall monopolize, or attempt 
to monopohze, or combine or conspire with any other person 
or persons, to monopolize any part of the trade or commerce 
among the several states, or with foreign nations, shall be deemed 
guilty of a misdemeanor, and, on conviction thereof, shall be 
punished by fine not exceeding five thousand dollars, or by im- 
prisonment not exceeding one year, or by both said punishments, 
in the discretion of the court. 

Section 3. Every contract, combination in the form of trust 
or otherwise, or conspiracy, in restraint of trade or commerce 
in any territory of the United States or of the District of Co- 
lumbia, or in restraint of trade or commerce between any such 
territory and another, or between any such territory or terri- 
tories and any state or states or the District of Columbia, or 
with foreign nations, or between the District of Columbia and 
any state or states or foreign nations, is hereby declared il- 
legal. Every person who shall make any such contract or en- 
gage in any such combination or conspiracy shall be deemed 
guilty of a misdemeanor, and, on conviction thereof, shall be 
punished by fine not exceeding five thousand dollars, or by im- 



SPECIMENS OF REGULATORY LAWS 587 

prisonment not exceeding one year, or by both said punishments, 
in the discretion of the court. 

Section 4. The several circuit courts of the United States 
are hereby invested with jurisdiction to prevent and restrain 
violations of this act; and it shall be the duty of the several 
district attorneys of the United States, in their respective dis- 
tricts, under the direction of the Attorney-General, to institute 
proceedings in equity to prevent and restrain such violations. 
Such proceedings may be by way of petition setting forth the 
case and praying that such violations shall be enjoined or other- 
wise prohibited. When the parties complained of shall have been 
duly notified of such petition the court shall proceed, as soon 
as may be, to the hearing and determination of the case; and 
pending such petition and before final decree the court may at 
any time make such temporary restraining order or prohibition 
as shall be deemed just in the premises. 

Section 5. Whenever it shall appear to the court before which 
any proceeding under section four of this act may be pending 
that the ends of justice require that other parties should be 
brought before the court, the court may cause them to be sum- 
moned, whether they reside in the district in which the court 
is held or not; and subpoenas to that end may be served in any 
district by the marshal thereof. 

Section 6. Any property owned under any contract or by any 
combination, or pursuant to any conspiracy (and being the sub- 
ject thereof) mentioned in section one of this act, and being in the 
course of transportation from one state to another, or to a 
foreign country, shall be forfeited to the United States, and may 
be seized and condemned by hke proceedings as those provided 
by law for the forfeiture, seizure and condemnation of property 
imported into the United States contrary to law. 

Section 7. Any person who shall be injured in his business 
or property by any other person or corporation by reason of 
anything forbidden or declared to be unlawful by this act, may 
sue therefor in any circuit court of the United States in the 
district in which the defendant resides or is found, without 
respect to the amount in controversy, and shall recover three- 
fold the damages by him sustained, and the costs of suit, in- 
cluding a reasonable attorney's fee. 



588 SUPPLEMENTARY FORMS 

Section 8. That the word " person," or " persons," wherever 
used in this act shall be deemed to include corporations and 
associations existing under or authorized by the laws of either 
the United States, the laws of any of the territories, and the 
laws of any state, or the laws of any foreign country. 



FORM 65 
ANTI-TRUST ACT OF THE STATE OF KANSAS 

Be it enacted by the Legislature of the State of Kansas: 

Section 1. That all arrangements, contracts, agreements, 
trusts or combinations between persons or corporations made 
with a view or which tend to prevent full and free competition 
in the importation, transportation or sale of articles of domestic 
growth or product of domestic raw material, or in the loan or 
use of money, or to fix attorneys' or doctors' fees, and all ar- 
rangements, contracts, trusts or combinations between persons or 
corporations designed or which tend to advance, reduce or con- 
trol the price or the cost to the producer or to the consumer of 
any such products or articles, — are hereby declared to be 
against public policy, unlawful and void. 

Section 2. It shall not be lawful for any corporation to issue 
or to own trust certificates, other than the regular and lawfully 
authorized stock thereof, or for any corporation, agent, officer 
or employes, or the directors or stockholders of any corporation, 
to enter into any combination, contract or agreement with any 
person or persons, corporation or corporations, or with any stock- 
holder or director thereof, the purpose and effect of which com- 
bination, contract or agreement, shall be to place the manage- 
ment or control of such combination or combinations, or the 
manufactured product thereof, in the hands of any trustee or 
trustees, with the intent to limit or fix the price or lessen the 
production and sale of any article of commerce, use, or con- 
sumption, or to prevent, restrict, or diminish the manufacture 
or output of any such article. 

Section 3. That all persons entering into any such arrange- 
ment, contract, agreement, trust, or combination, or who shall, 
after the passage of this act, attempt to carry out or act under 



SPECIMENS OF REGULATORY LAWS 589 

any such arrangement, contract, agreement, trust or combination 
described in sections one or two of this act, either on his own 
account or as agent or attorney for another, or as an officer, 
agent or stockholder of any corporation, or as a trustee, commit- 
tee, or in any capacity whatever, shall be guilty of a misdemeanor, 
and on conviction thereof shall be subject to a fine of not less 
than one hundred dollars and not more than one thousand dollars, 
and to imprisonment not less than thirty days and not more than 
six months, or to both such fine and imprisonment, in the dis- 
cretion of the court. 



FORM 66 

MARYLAND'S BLUE SKY LAW 

CHAPTER NO. 552. 

An ACT to prevent fraud respecting securities offered for sale 
within the State of Maryland, and to provide a summary pro- 
ceeding therefor, and for other purposes relating thereto, by 
adding four (4) additional sections to Article 32A of the Anno- 
tated Code of Public General Laws of Maryland, entitled " De- 
partment of Law," to be numbered 11, 12, 13 and 14. 

Section 1. Be it enacted by the General Assembly of Mary- 
land, That (4) new sections are hereby added to Article 32A 
of the Annotated Code of Public General Laws of Maryland, 
entitled "Department of Law," to be known as Sections 11, 12, 
13 and 14, for the purpose of preventing fraud respecting securi- 
ties offered for sale in the State of Maryland, and to provide 
a summary proceeding therefor, and for other purposes relating 
thereto, said sections to read as follows: 

Section 11. If it shall appear to the Attorney General of the 
State of Maryland that in the issuance, sale, promotion, negotia- 
tion, advertisement of, or distribution of any stocks, bonds, notes 
or other securities within the State of Maryland, any person, 
partnership or corporation is employing or is about to employ 
any device, scheme or artifice to defraud, or for obtaining money 
or property by means of any false or fraudulent pretense, repre- 
sentation or promise, or the said Attorney General believes it to 



590 SUPPLEMENTARY FORMS 

be in the interest of the pubhc that an investigation be made with 
a view to the issuance of an order, such as herein provided, he 
may require such person, partnership or corporation to file with 
him a statement in writing under oath as to all facts concerning 
the same, and for that purpose may prescribe forms upon which 
said statements shall be made. The Attorney General may re- 
quire, in addition thereto, such further data and information as 
he may deem relevant and make such special investigation as 
may be necessary and for the purposes of this Act the Attorney 
General, or an Assistant Attorney General duly authorized by 
him, shall have power to require by subpoena or summons, the 
attendance and testimony of witnesses and the production of 
any books, accounts, records, papers and correspondence relat- 
ing to any matter which the Attorney General is authorized by 
this Act to consider or investigate. The Attorney General, or his 
duly authorized assistant, may sign subpoenas, administer oaths 
and affirmations, examine witnesses and receive evidence. In 
case of disobedience to a subpoena or of the contumacy of any 
witness appearing before the Attorney General or his duly 
authorized Assistant Attorney General, the Attorney General 
may invoke the aid of the Circuit Court of any of the counties 
of the State of Maryland, or of the Superior Court of Baltimore 
City. Such court may thereupon issue an order requiring the 
person subpoenaed to obey the subpoena or to give evidence or 
produce books, accounts, records, papers and correspondence 
touching the matter in question. Any failure to obey such order 
of the court may be punished by such court as a contempt 
thereof. In the case of a failure or refusal of any person, part- 
nership or corporation concerned in the issuance, sale, offer for 
sale, promotion, advertisement or distribution of any stocks, 
bonds, notes, or other securities within the State of Maryland, to 
file any statement or to furnish any information, books, papers 
or records required by the Attorney General or his duly author- 
ized assistant, to be filed or furnished in connection with such 
investigation under this Act, the Attorney General may issue his 
order under Section 12 of this Act. 

Section 12. The Attorney General may, upon evidence satis- 
factory to him, that in the issue, sale, promotion, negotiation, 
advertisement of, or distribution of any stocks, bonds, notes or 



SPECIMENS OF REGULATORY LAWS 591 

other securities within the State of Maryland, any person, 
partnership or corporation is employing or is about to employ 
any device, scheme or artifice to defraud, or for obtaining money 
or property by means of any false or fraudulent pretense, repre- 
sentation or promise, issue and cause to be served upon such 
person, partnership or corporation an order requiring the party 
guilty thereof to cease and desist therefrom. If it shall appear 
to the Attorney General that an irreparable public injury is 
imminent unless such an order is issued before a full investigation 
can be made pending such investigation, he may issue such order 
but the same shall be accompanied with a request for information 
as to the facts relied on in issuing the order, and such temporary 
order shall only remain in force until such information is fur- 
nished and two days thereafter. Orders of the Attorney General 
under this section may be served by anyone duly authorized by 
the Attorney General either (a) by delivering a copy thereof 
to the person to be served; or to a member of the partnership 
to be served, or to the president, vice-president, secretary or 
other executive officer or director of the corporation to be served; 
or (b) by leaving a copy thereof at the principal office or place 
of business of such person, partnership or corporation; or (c) 
by registering and mailing a copy thereof, addressed to such per- 
son, partnership or corporation at his or its principal office or 
place of business. A verified return by the person so serving said 
order, setting forth the manner of said service, shall be prima 
facie proof of the same, and the return postoffice receipt for said 
order registered and mailed as aforesaid shall be prima facie 
proof of the service of the same, as aforesaid. 

Section 13. Any person, partnership or corporation affected 
or aggrieved by the order of the Attorney General under Section 
12 shall be entitled to a hearing de novo before the Circuit Court 
of the county in w^hich said person, partnership or corporation 
has performed or is alleged to have performed the acts referred 
to in said order of the Attorney General, or in the Superior Court 
of Baltimore City, if said acts or alleged acts occurred in Balti- 
more City, or, at the option of said person, partnership or cor- 
poration, said proceeding for a hearing de novo may be filed 
in the Circuit Court for the County in which said person, 
partnership or corporation resides or has its principal office 



592 SUPPLEMENTARY FORMS 

within the State of Maryland, or in the Superior Court 
of Baltimore City, if such residence or office is in Bal- 
timore City. And in such proceeding any such person, partner- 
ship or corporation shall be entitled to have any issues of facts 
arising therein determined by a jury, provided written demand 
is filed at the time of the institution of said proceeding. The 
court shall have power during the pendency of the proceeding 
before it, to suspend or modify the order of the Attorney General 
and to enter an appropriate judgment or order at the conclu- 
sion of such hearing to modify, affirm or set aside order. From 
the final order or judgment of the said court, either party to 
said proceeding may appeal to the Court of Appeals of Mary- 
land as in other cases or suits at law arising in said court; and, in 
case of such appeal, the testimony adduced before the court 
shall be presented to the Court of Appeals by bills of exception 
in customary form, as in other law cases, and the Court of Ap- 
peals may review the questions of law arising on said appeal as 
in other appeals from courts of law and in ordinary course. 

Section 14. Any person, partnership or corporation having 
been served with any order of the Attorney General under Sec- 
tion 12 of this Act, or having knowledge of the issuance of said 
order and while said order remains in effect, either as originally 
issued or as modified, who or which shall execute or carry on in 
any manner any scheme or device against said order has been 
issued, or wilfully attempts so to do, or shall sell or deliver or 
receive payment in money or property for any paper, certificate 
or instrument purporting to be or represent any interest in or 
order, for stocks, bonds, notes or other securities mentioned in 
said order of the Attorney General, or shall pubUsh or cause to 
be published any advertisement of any such stocks, bonds, notes 
or other securities pursuant to said scheme or device against 
which said order has been issued, shall be guilty of a misdemeanor 
and, upon conviction, shall be fined not more than ten thousand 
dollars ($10,000) or imprisoned not more than two years, or 
be subject to both fine and imprisonment, in the discretion of 
the court. 

Section 2. Be it enacted, That this Act shall take effect June 
1, 1920. 

Approved April 16, 1920. 



INDEX 



Abuses, kinds that call for 
criticism, 408 

legislation and reports against 
trusts, 407 

Acommenda, 46 

Adams Express Co., 107 

Addystone Pipe Pool, 269 

Administration of corporation, 
189 

Administrative abuses, 408 

Affiliated company, 208 

Agreements, 254; See also Fac- 
tor's agreements 

Aktiengesellschaft, 100 

Aktiengesellschaft fiir Rheinisch- 
Westfalische Industrie, 370 

Allen & Ginter, 384, 385 

A 1 1 g e m e i n e Elektrizitatsge- 
sellschaft, 371, 374, 375 

Amalgamations, 210, 255; of in- 
dustrial subsidiaries, 338 

Amer. Bell Telephone Co., 335 

Amer. Booksellers' Assn., 247, 
275 

Amer. Can Co., 429; securities 
turnover, 94 

Amer. Cigar Co., 392, 394 

Amer. Cotton Oil Trust., 318, 321 

Amer. Druggists' Syndicate, 247, 
348 

Amer. Foreign Securities Co., 300 

Amer. Ice Co., 427 

Amer. International Corporation, 
300-301, 367 

Amer. Iron and Steel Institute, 
278 

Amer. Locomotive Co., securities 
turnover, 94 

Amer. Malting Co., 422 



Amer. Milling Co., balance sheet, 
146, 147 

Amer. Pipe & Construction Se- 
curities Co., 368 

Amer. Power and Light Co., 364 

Amer. Publishers Assn., 247, 275 

Amer. Smelting & Refining Co., 
securities turnover, 95; under- 
writing profit, 415 

Amer. Snuff Co., 392 

Amer. Stogie Co., 392, 396 

Amer. Sugar Trust, 229 

Amer. Telephone & Telegraph 
Co., 247; as control company, 
335; chart of control, 336; se- 
curities turnover, 94 

Amer. Tobacco Co., 207, 264, 271, 
428 ; exclusive arrangements, 
264; sketch of growth (from 
the Supreme Court decision), 
383-404 

Amer. Window Glass Co., 272, 
487 

Annual meetings. See Sto,ck- 
holders' meetings 

Anti-trust legislation, 407; fed- 
eral, 440, 442; Kansas Anti- 
Trust Act, 588 

Armour & Co., 315, 316 

Articles of association, 101, 157 

Articles of co-partnership, 55 

Articles of incorporation, 157 

Assets, corporation, 146; di- 
rectors' resolution for sale, 
form, 538; dividends out of, 
422; sale, 537; stockholders' 
resolution for sale, form, 538; 
wasting, 421 

Associated assistants, 31 



593 



594 



INDEX 



Associated Bell Companies, 336 

Associated Dry Goods Corpora- 
tion, 248, 348 

Association, 256 

Associations, as business combi- 
nations, 256; business men's, 
254, 256; business men's in 
other countries, 260; classes of 
business men's, 257-258; gen- 
eral commercial, 258; special 
trades, 259 

Associazione in participazione, 
47 

Assumption companies, 294, 356, 
380; See also Finance and 
assumption companies 

Atlantic Coast Line, pyramided 
control, 313, 314 

Atlantic, Gulf and West Indies 
Steamship Lines, 347 

Atlantic Snuff Co., 393 

Auditor of corporation, 195 

Audits, 195 

Automobile industry, 251; char- 
ter, object clause form, 483 

Autosales Corporation, 487 

Baltimore & Ohio R. R. Co, 203 

Bank fiir Elektrische Unterneh- 
mungen, holdings, 371-373 

Banking, Italian, 46; See also 
Banks 

Bankruptcy, 24 ; individual, 41 ; 
participation associations, 50; 
trusts and, 229 

Banks, 13; close interrelation 
with railroad and railroad 
equipment companies (chart), 
opp. 417; double liability of 
stockholders, 115; finance oper- 
ations, 358 

Barter, 10 

Battle Ax Plug, 428 

"Bears," 424 

Beaver skins, 11 

Beet sugar companies in Ger- 
many, 102 



Belgium, combinations, 253; fi- 
nance companies, 378 

Bell System, 335 

Bell Telephone Co. of Pennsyl- 
vania, 210 

Beneficiaries of trusts, 214, 220; 
liability, 223; rights and 
powers, 221; transferability of 
interest, 223 

Bethlehem Steel Co, 309 

Big business, 199, 200; abuses, 
408 

Blacklisting, 429 

*' Blue sky " laws, 437 ; Mary- 
land's law, 589 

Board of directors. See Directors 

Bobbs-Merrill Co., 275 

Bogus companies, 207, 428 

Bond conversion of U. S. Steel 
Corporation, 419 

Bond dividends, 187 

Bonds, 13, 14, 83, 86, 124, 135; 
bond certificate, simple form, 
501, 502; forms, 496; methods 
of payment, 139; mortgage to 
secure bonds, short form, 497; 
principal, 139; rate of return, 
139; state limitation, 434; 
structural elements, 136; va- 
rieties, 136 

Book trade, 247, 275 

Boot and shoe industry, 246 

Boston real estate trusts, 232 

Boycotting, 429 

Brazil coffee valorization, 273 

Brewers' Assn., 268 

British East India Co., 106 

British Industries, Federation of, 
260 

Brokers, charter, object clause 
form, 485; in securities, 92; 
stock held by, 96 

"Bulls," 424 

Burley Tobacco Growers' Assn., 
271 

Business Corporation Laws of 
New Hampshire, 151, 156 



INDEX 



595 



Business corporations, 120, 197; 
See also Corporations 

Business establishments, classi- 
fication, 4; definition, 3; func- 
tion, 4; plasticity, 5 

Business men's associations, 254, 
256 

Business trust, 213; agreement 
and declaration (Mass. Gas 
Companies), 540; See also 
Trusts 

By-laws, 503 ; adoption, 164 ; con- 
tents, list of topics treated, 
165; of corporations, 163; pur- 
pose, 164; standard form (i.e. 
U. S. Steel Corporation), 
503 

Calendar, corporate, 193 

California Fruit Growers' Assn., 
271 

California Patents Co., 415 

Call loan, 424 

Capacity production, 239, 240 

Capital, as foundation of owner- 
ship organization, 3; concept, 
and its influence on organiza- 
tion, 8; concept as keystone 
of arch of business, 8 ; changing 
concept, history, 8; commodi- 
ties as, 9; dividends out of, 
422, 426; growth of concept, 
9; increase of requirements, 
24; limitations in individual 
proprietorship, 43; money as 
capital, 12; securities capital, 
16 

Capital Issues Committee, 449 

Capital stock, 124 ; charter clause 
as to, 160; charter clauses for, 
485; par and non-par value, 
124, 125 

Capitalist, laborer distinguished 
from, 12 

Capitalization, definition in refer- 
ence to corporations, 143; rail- 
. ways in the United States, 147, 



148; state requirements and 
regulation, 434 

Carnegie Steel Co., 72, 125 

Cash dividend, 186 

Cecil Rhodes group of finance 
and investment companies, 
376-377 

Central District Telephone Co., 
(of Pa.), 210 

Central Massachusetts Light & 
Power Co., 322 

Central Pacific R. R. Co., 306 

Central purchase pools, 272 

Central Sugar Corporation, 487 

Centralized sales plan of pool, 
270 

Centralization, 30 

Certificate of incorporation, 157; 
See also Charters 

Certificates, joint stock com- 
panies, 103; stock, 126; stock, 
forms, 488; See also Stock cer- 
tificates 

Chamber of Commerce, Inter- 
national, 261 

Chamber of Commerce of the 
State of New York, 258 

Chamber of Commerce of the 
U. S. A., 258 

Chambers of Commerce, 258 

Charters, 479; application by in- 
corporators, 152; certification, 
154; character, powers con- 
ferred by, 158; control com- 
pany, industrial (i.e. U. S. 
Steel Corporation, amended), 
573; corporation, 111; form of 
certificate of incorporation 
(State of New York), 480; 
main features and provisions, 
158; nomenclature, 157; object 
or purpose clauses, forms for, 
482 ; pure securities-holding 
corporation (i.e. Northern Se- 
curities Co.), 581; recording, 
154 ; states with " bargain 
counters," 200; taxes, 154 



596 



INDEX 



Chicago Bearing Metal Co., 316- 
317 

Chicago Securities Co., 300 

Cigarette manufacturing con- 
cerns, 384 

Cincinnati, New Orleans & Texas 
Pacific Railway Co., 307 

Cities, commercial associations 
in, 258 

Cities Service Co., 364, 365, 
366 

City Investing Co., 300 

Civil law, 40 

Claflin (H. B.) & Co., 347-348, 
417 

Clayton Act of 1914, 262, 427; 
provisions, 446 

Close corporation, 166 

Cluett, Peabody & Co., securi- 
ties turnover, 95 

Co-adventurers, 69 

Coal industry in Germany, 281, 
284 

Coffee valorization, 273 

Collateral trust bonds, 138 

Columbia Graphophone Mfg. 
Co., 488 

Combination organizations, 237 

Combination trusts, 176, 232, 233 

Combinations, 17; causes, 238; 
classification, 253; direction in 
which they may take place, 
244; European history, 251- 
252; fluctuating course of for- 
mation, 251 ; group not involv- 
ing ownership rights, 254, 256; 
horizontal and vertical, 244, 
245; in restraint of trade, 430; 
prevalence, 237 

Commandatary, 45 

Commenda, 46, 52 

Commercial associations, general, 
258 

Commercial capital, 13 

Commercial paper, securities and, 
80; three kinds, 80 

Commodities, as only form of 



capital, 9; direct exchange — 
barter, 10 
Commodity paper, 80, 81 
Common law, 18; organization 

based on, 22 
Common stock, 128; classifica- 
tion, 131 
Commonwealth Gas and Electric 

companies, 323 
Competition, 17, 265, 352; un- 
fair, 427, 446 
Comptroller of corporation, 195 
Concentration, 237, 238 
Conditional requirements, 262 
Congress, power over business, 

20 
Conley Foil Co., 392, 394 
Consolidated Goldfields of South 

Africa, Ltd., 377 
Consolidated Lake Superior Co., 

422 
Consolidated Steel Corporation, 

271-272 
Consolidated Tobacco Co., 398 
Consolidation of corporations, 
209 ; directors' resolution, form, 
571 ; shareholders' resolution 
authorizing, form, 573 
Constitution, U. S., 19 
Continental Tobacco Co., 389 
Contract control, 303, 304, 305 
Contracts, co-partnership, 53; 
participation associations and, 
48 
Control, by agreement, 304; by 
contract, 303, 304, 305; by 
participation, 303, 304, 307; 
directness, 28; elimination of 
personal, 97; individual pro- 
prietorship, 42; instrumentali- 
ties, 303; pyramided, 308 
Control companies, 294; advan- 
tages, 349; among industrial 
corporations, 337; among pub- 
lic utilities, 335; chart of types 
of inter-corporate control, 325 ; 
charter of an industrial con- 



INDEX 



597 



trol company (i.e. of U. S. 
Steel Corporation, amended), 
573; holding companies as, 
323; in ocean transportation, 
345; in other countries, 348; 
mercantile, 347; monopolistic 
— growth of Amer. Tobacco 
Co., 383-404; railroads, 327; 
trusts as, 318; weaknesses, 353 

Control of prices, 261 

Conversions, 418, 419 

Convertible stock, 134 

Conyngton, Thomas, 70, 125, 163, 
164, 175 

Co-partnership, articles of, 55 

Copper syndicate, 273 

Corn Products Co., 353 

Comer, 424, 425, 426 

Corporate calendar, 193 

Corporate control, 432 

Corporate bond. See Bonds 

Corporate securities, 124; See 
also Securities 

Corporate signatures, 536, 537 

Corporation Journal, 156 

Corporation laws, 431 ; revision, 
systematic, 435 

Corporations, 14, 89, 99, 109; 
abuses in securities-holding, 
207; advantages, 120; apphca- 
tion for charter, 152; auditor, 
195 ; business corporations, 
120; by-laws, 163, 503; capital 
stock, charter provisions, 160; 
capitalization, 143 ; charter, 
479; charter, form for, 480; 
charter, forms for object or 
purpose clauses, 482 ; classifica- 
tion, 119; comptroller, 195; 
consolidation, 209 ; construc- 
tion of the term in special 
states, 151; counsel, 195; crea- 
tion, 111; credit, 122; defini- 
tion, 110; direction and con- 
trol, 115; directors, board of, 
177; disadvantages, 122; dis- 
solution and termination, 117, 



537; duration and liability in 
charter, 161 ; eleemosynary, 
120; external influences favor- 
ing, 199; financial statement, 
form, 535; formation, proce- 
dure, 151 ; forms and docu- 
ments used in organizing, 473; 
franchise fees of selected states, 
154; general contract to form 
(State of Illinois), 473; gen- 
eral corporation laws, 150 ; gen- 
eral executive officers, 190; 
general features, 109; general 
manager, 191; history, 109; in- 
corporators, particulars as to, 
161 ; lack of uniformity in the 
United States, 113; legal status, 
111; liability, 114; location of 
main office, 159; meetings for 
organization, 155; mining, 128; 
municipal, 119, 120; name, 
159; number in given indus- 
tries compared with individu- 
als, 198; object and purpose, 
159; obligations, 117; ofiicers, 
189; onerous obligations, 31; 
operating mechanism, 166; or- 
ganization taxes and fees, 154; 
organizing — cut and dried 
procedure, 157; organizing — 
method of procedure, 151; or- 
ganizing — reversed procedure, 
156 ; over-capitalization, 148 ; 
ownership, 114; permanence 
and stability, 116; preference 
for this form of ownership or- 
ganization, 197; pre-incorpora- 
tion agreement, 152; president 
and his duties, 190; principles 
of control, 112; qualifications 
of incorporators, 152; records, 
193; regulations governing 
operation, 119; reorganizations, 
117; reports, 118; right to in- 
spect books of, 129; secretary 
and his duties, 192 ; securities- 
holding type, 202 ; simple type, 



598 



INDEX 



201, 202; special laws, 150; 
special provisions, 162; sphere 
of activity, 113; standing com- 
mittees, 162; states that en- 
courage, 200 ; stockholders, 
1.67; subscription list, simple 
form, 478; taxation (federal) 
less than other forms of or- 
ganization, 200; taxes, 118; 
three distinct bodies, 166; 
treasurer and his duties, 191 ; 
trustee's subscription list, form, 
479, types, from standpoint of 
structure, 200; use of this form 
of ownership organization, 197; 
vice-president, 191 ; voting 
powers of stockholders, 133 

Cotton, cornering supply, 272, 
273 

Cotton textile industry, 246 

Counsel, corporation, 195 

Court of equity, trusts and, 220, 
228 

Credit, 14; corporation, 122; in- 
dividual, 42 

Credit Mobiher, 359 

Creditor paper, 84 

Creditors, protection of interests, 
452; suits against partners, 
62 

Crops and industrial revival of 
1897, 249 

Cummins Bill, 441 

Cumulative preferred stock, 133 

Cumulative voting, 173 

Curtailment of output, 268, 282 

Dartmouth College case, 110, 112 

Death, 27 

Debenture, 137 

Debenture bonds, 138 

Debenture stock, 134 

Debentures and short time notes, 
141 

Debts, partners' liability, 61 

Delaware, 436; charters to cor- 
porations, 200 



Delaware, Lackawanna & West- 
ern R. R. Co., 306 

Delegation of powers by di- 
rectors, 183 

Demand, 240; see also Supply 
and Demand 

Department stores charter, ob- 
ject clause form, 483 

Depreciations, 421 

Des Moines Union Railway Co., 
311 

Dewing, A. S., 123, 170; on pro- 
motions, 412; on promoters' 
profits, 416 

Diamond Match Co., 246, 426 

Differential voting, 174 

Direction, in individual pro- 
prietorship, 42; in partner- 
ships, 57; problems, 28 

Directness of control, 28 

Directors, board of, 29; board 
of, in joint stock companies, 
104; chairman of the board, 
189; charter provisions as to, 
161; classification, 162, 178; 
compensation, 181 ; of corpora- 
tions, 116; cumulative plan of 
electing, 173; delegation of 
authority, 183; election, 155, 
178; executive committee and 
finance committee, 184; func- 
tion of the board, 177; indi- 
vidual director's relation to 
corporation, 181 ; managerial 
power, 182 ; meetings, 188, 522 ; 
meetings, call and waiver for 
first meeting, form, 523-524; 
miscellaneous powers, 188; no- 
tice of election as director, 
form, 530; number, 179; power 
to declare dividends, 185; 
powers of board, 182; powers 
of individual, 181; qualifica- 
tions, 161, 179; removal, 179; 
residence, 180; resolution de- 
claring dividend, forms, 533, 
534; resolution for consolida- 



INDEX 



599 



tion, form, 571; resolution for 
special meeting, form, 527; re- 
sponsibilities indefinite, 411; 
sale of assets, form of resolu- 
tion, 538; small holdings re- 
quired, 409; term of office, 178; 
vacancies in board, power to 
fill, 184 

Dissolution of corporation, 537; 
form of notice, 539 

Dissolution of partnership, form 
of notice, 466 

Distilleries, 268 

Distillers' and Cattle Feeders' 
Trust, 318, 321 

Dividends, 533; directors' resolu- 
tion declaring, forms, 533; il- 
legal, 188; kinds, 186; notice 
of dividend in form of prop- 
erty, form, 534; policies con- 
cerning, 421 ; power to declare, 
185; power to declare, in joint 
stock companies, 104; preferred 
stockholders, 132; procedure in 
declaring, 186; statutory re- 
strictions on declaration, 185; 
stockholders' rights to, 130; 
treasurer's notice, form, 534 

Dodd, S. C. T, 318 

Doherty, H. L., 366 

Domestic organizations, 22 

Dormant partners, 63 

Double liability, 115 

Double taxation, 228 

Dresdener Bank, 374 

Drug industry, 247; pool, 273 

Druggists' Associations, 274 

Drummond Tobacco Co., 388, 
389 

Dry goods trade, 348 

"Dry" trust, 213 

Duke, J. B, 389, 398 

Duke (W.), Sons & Co., 384, 385 

" Dummy " corporation, 157 

Dummy directors, 180, 409 

Dummy organization, 334 

Dummy stockholders, 313, 315 



Du Pont (E. I.) de Nemours & 
Co., 206, 310; General Motors 
Corporation and, 312; local 
price cutting, 428; varied in- 
terests, 345 

Durability, 25; of individual 
proprietorship, 41 

Eastman Kodak Co., 264, 428, 
429 

Economic development, 5 

Economic stages, three histori- 
cal, 8 

Eddy, A. J., 277 

Election as director, form of no- 
tice, 530 

Election forms, 529 

Electric Bond and Share Co., 
362, 363 

Electric Lamp Combine, 207 

Electric lamps, 263 

Electrical companies, financing 
subsidiaries, 361 

Electrical industry, German fi- 
nancing, 371 

Electrical Securities Corporation, 
362 

Eleemosynary corporations, 120 

Elkins Act of 1903, 440 

England, business asso,ciations, 
260; combinations, 252; cor- 
porations, 201 ; financial com- 
panies, 358, 376; investment 
companies, 296; investment 
trusts, 234; kartells, 286 

Engrossing, 429 

Entrepreneur, effect of death, 27; 
liability, 23; private and pub- 
lic, 3; responsibility of con- 
trol, 28; risk assumed, 12 

Entrepreneurial organization, 14; 
see Ownership organizations 

Equipment, rigidity, 79 

Equipment trust bonds, 138 

Equitable Life Insurance Co., 
414 

Europe, business associations, 



600 



INDEX 



260 ; combinations, history, 
251-252 ; control companies, 
348; corporations versus joint 
stock companies, 107 

European Petroleum Union, 376 

Exchange, medium of, 10 

Exchanges, stock, 92 

Exclusive arrangements, 262, 263, 
429 

Expansion, 24 

Exploration Co., Ltd., 366 

Export associations, 259-260 ; 
steel, 271-272; textiles, 271 

Export combinations, 448 

Express companies, 270 

Factors' agreements, 254; as in- 
struments of combination, 262 ; 
conditional requirements type, 
262 ; exclusive arrangements 
type, 262, 263; memorandum, 
form, 555; preferential ar- 
rangements type, 262, 264; 
three kinds, 262 

Factory system, 7 

Failures, by financial misman- 
agement, 416; individual, 41 

Fairs, 10, 11 

Family interests, 312, 315 

Federal control, 453 

Federal Income Tax law of 1918, 
corporations and, 200 

Federal incorporation, 454 

Federal legislation, 439 

Federal Shipbuilding Co., 206. 
338 

Federal Trade Commission, on 
packing companies and dummy 
holdings, 313, 315, 316; powers, 
440; report on the packing 
industry, 324 

Federal Trade Commission Act 
of 1914, provisions, 444 

Federal Utilities, Inc., 300 

Federation of British Industries, 
260 

Federations, 265 ; advantages. 



287; disadvantages, 287; effect 
on industry, 286 
Fictitious persons, control 

through, 316 
Fiduciaries, control through, 313 
Fighting instruments, 428 
Finance and assumption com- 
panies, 356; American ex- 
amples, 361; evaluation, 378; 
in Germany, 368; in other 
countries, 376; special, 358, 
359 
Finance companies, 293, 358 
Financial management, abuses, 

416 
Financial readjustments, 418 
Financial statement of a corpora- 
tion, form, 535 
Financiers, regulation, 450 
Financing, abuses, 411; agencies, 
358; company, 357; risk, 380 
Finzer (John) & Brothers, 389 
Foreclosure control, 304, 309 
Foreclosure of corporations, 140 
Foreign Bond & Share Corpora- 
tion, 300 
Foreign organizations, 22 
Foreign trade, Amer. Interna- 
tional Corporation, 367; Webb 
Act, 447 
Foreign trade associations, 259- 

260 
Founders' shares, 135, 302 
France, business associations, 

261 ; combinations, 253 
Franchises, 146 
Free trade, 252, 286 
Freight rates and pools, 275 
French Copper Syndicate, 273 
Full-line forcing, 263 
Fur-trading posts, 10 
Fusions, 255 

G. m. b. H., 374 

Gail (G. W.) & Ax, 387 
Gary, Ind., 206, 338, 359 
Gary, E. H., 278, 418; dinners, 



INDEX 



601 



278; on federal incorporation, 
456 

Garrett (W. E.) & Sons, Inc., 
393 

Gas and Electric Securities Co., 
366 

Gelegenheitsgesellschaft, 47 

General Electric Co., 211; fin- 
ance and assumption com- 
panies, 361, 364, 365 (chart); 
financing subsidiaries, 361, 362; 
restraint of trade, 263 

General manager of corporation, 
191 

General mortgage bond, 138 

General Motors Corporation, 
134, 307, 345; control, 310; E. 
I. du Pont de Nemours & Co. 
and, 312; subsidiaries, 206 

General partners, 63 

German Steel Syndicate, 279 

Germany, business associations, 
260; combinations, 211-212, 
252; electrical industry, fi- 
nancing, 371 ; finance and as- 
sumption companies, 368; rail- 
way construction, financing 
companies, 374 

Gilds, 256 

Gilmore, E. A., 52 

Gliickauf, 284 

Glucose Sugar Ref. Co., 149 

Gold bonds, 140 

Good-will, 146 

Goodwin & Co., 384, 385 

Goods. See Commodities 

Gould, Jay, estate, 315, 316 

Government, control, 453; effect 
on business, 19, 20 

Government regulation of cor- 
porations, 122 

Grocery business, charter, ob- 
ject clause form, 484 

Gulf States Steel Co., 524 

Hammond, J. H., 273 
Hanseatic League, 257 



Hardware business charter, ob- 
ject clause form, 483 

Harriman System, description, 
328; railroad companies in 
1911 (chart), 331 

Harrows, 276 

Helme (George W.) Co., 393 

Hepburn Amendment of 1906, 
440 

Hill, J. J., 328 

Holding companies, 16, 202, 294; 
advantages, 349; among rail- 
roads, 327; as control com- 
panies, 323; industrial, 337; 
See also Securities-holding cor- 
porations 

Holding trust, 232, 233 

Horizontal combination, 244, 245 

Houston, D. F., 201 

Huntington, C. P., 332 

Illinois Central R. R. Co., 524 
Imperial Tobacco Co., 397 
Impersonal organization, theory, 

77 
Incomes, 12; summary of 

sources, 88 
Incorporators, 111; charter pro- 
visions as to, 161; qualifica- 
tions, 152 
Indenture, 137 
Indiana Steel Co., 338, 359 
Indirect control, explanation, 

312 
Individual proprietorship, 39 ; 
capital limitations, 43; charac- 
teristics, 40 ; direction and con- 
trol, 42 ; durability, 41 ; evalua- 
tion, 44; formation, 40; lia- 
bility, 41 
Industrial associations, 259 
Industrial companies, control 
companies among, 337; lease- 
holds, 307 
Industrial revival of 1897, 249 
Industrial system as favorable to 
corporate organization, 199 



602 



INDEX 



Inflation of corporate securities, 
146 

Inheritance, 5 

Insolvency, 27 

Inspectors of election, form of 
certificate, 530; form of oath, 
529 

Insurance companies, 407; in- 
vestments, 301 

Integration, 244, 245, 248; period 
of, 249 

Interborough-MetropoHtan Co., 
309, 335 

Interest, ban on, 46 

Interlocking directors, 366, 447 

Intermediary companies, control 
through, 312 

International & Great Northern 
R. R. Co., 316 

International Chamber of Com- 
merce, 261 

International Harvester Co., 263, 
428; securities turnover, 94 

International Mercantile Marine 
Co., 247; as control company, 
345, 346 (chart) ; securities 
turnover, 94 

Interstate commerce, federal reg- 
ulation, 454 

Interstate Commerce Commis- 
sion, report on control, 303; 
report on intercorporate rela- 
tions, 324 

Interstate Commerce Commis- 
sion Act, 245, 266, 440 

Intimidation, 429 

Investment brokers' charter, ob- 
ject clause form, 485 

Investment companies, 294 ; 
American, 299; criticism, 302; 
in England, 252, 296; in other 
countries, 301-302 

Investment paper, 80, 81; classi- 
fication, table, 83 

Investment trust, 232, 234 

Iron and steel, 248; see also Steel 
industry 



Ital}^ business associations, his- 
torical, 46 

Johannesburg Consolidated In- 
vestment Co., Ltd., 378 

Johnson Tinfoil & Metal Co., 
394 

Joint adventures, 69 

Joint control, explanation, 311 

Joint sales plan of pool, 270 

Joint stock companies, 14, 51, 68, 
99, 100; articles of association 
(contract), 101; articles of 
association, form, 467; capi- 
talization, 102; definition, 100; 
disadvantages and future pros- 
pects, 108; dissolution, 106; 
external relations, 105; forma- 
tion, 100; internal organiza- 
tion, 103; legal status, 105; 
liabilitj'^ of members, 106; 
permanence and stability, 106; 
stock, 102; value and use, 107 

Joint Traffic Assn., 276 

Jurisprudence, 18 

Kansas, Anti-Trust Act, 588; 
" blue sky " law, 437 

Kansas City Sto,ck Yards Co., 
315 

Kartells, 252, 254, 265; defini- 
tion, 278; distribution, 285; 
integration, 284 ; obstacles, 
279; purpose, 279; types, 280 

Kassel District, Germany, 284 

Keene, J. R., 425 

Kimball (W. S.) & Co., 384, 385 

Kinney Tobacco Co., 384, 385 

Knickerbocker Trust Co., 358 

Kolenkontor, 285 

Kommanditgesellschaft, 67 

Kongo region, 10 

Labor problems, federations and, 
288 

Laborer and capitalist distin- 
guished, 12 



INDEX 



603 



Large scale production, 17 

Law, John, 101, 423 

Laws, laxity, 409 

Lead Trust, 318 

Leaseholds, 303; industrial com- 
panies, 307; railroads, 305 

Legal foundation, 18 

Legal status, 32 

Legal title, subdivision, 205 

Legislation, federal, 439; reme- 
dial, 432 

Lehigh and Hudson River R. R. 
Co, 311 

Lenz & Co, 374, 375 

Lever Brothers, Ltd, 252 ; classes 
of stock, 143 

Liability, co-adventurers, 69 ; 
corporations, 114; double, 115; 
of entrepreneur, 23; individual 
proprietorship, 41 ; limited, 24 ; 
members of joint stock com- 
panies, 106; partnerships, 61; 
syndicate members, 69 

Licenses, 438; federal, 456 

Licorice business, 395 

Liefmann, Robert, 16, 72, 286, 
370; on electrical companies' 
financing, in Germany, 375- 
376; on participation com- 
panies, 295 

Life insurance companies, influ- 
ence, 414 

Limited Companies Act, 252 

I<imited liabihty, 24; corpora- 
tions, 114; states and, 32 

Limited partnership, 67 

Loan capital, 13 

Lobbyists, 257 

Lockwood Committee, 278 

Lorillard (P.) Co, 389 

Louisiana, 53; law, 19; limited 
partnerships, 67 

MacAndrews & Forbes Co, 392, 

395 
Machinery, exclusive control, 

429 



Macy (R. H.) & Co, 275 

Management, corporation di- 
rectors' power, 182; partner- 
ships, 57; responsible, 433; 
trustees as managers, 215 

Managers' shares, 302 

Managing director, 183 

Manipulation of markets, 430 

Mannstaedt, Heinrich, 280, 283 

Manufactures, export trade in 
1897, 250 

Manufacturing, capital require- 
ments, 24, 44; Census (1909) 
comment on corporate estab- 
lishments, 197; character of 
ownership organization, 89 ; 
individual proprietorship and, 
44; partnerships in, 70 

Marburg Brothers, 386 

Margin, 424 

Market, territorial division of, 
269 

Marshall, John, on interstate 
commerce, 454; on the cor- 
poration, 110 

Maryland " blue sky " law, 589 

Massachusetts, control trusts, 
322 ; manufacturing corpora- 
tion law, 180 

Massachusetts Gas Companies, 
232; agreement and declara- 
tion of trust, 540 

Massachusetts Lighting Com- 
panies, 323 

Mayo (P. H.) & Bros, 389 

Meat packing. See Packing in- 
dustry 

Medici families, 46 

Medium of exchange, period of 
economic development, 10 

Mercantile control companies, 
347 

Mercantile establishments, 44 

Mercantile Stores Co, Inc, 248, 
348 

Merchant Adventurers, 257 

Merchants associations, 258 



604 



INDEX 



Merchants of the Staple, 257 

Mergers, 209, 255; of industrial 
subsidiaries, 338 

Michigan Salt Assn., 270 

Midvale Realty Corporation, 
124 

Milking the corporation, 416 

Mining charter, object clause 
form, 484 

Mining corporations, 128 

Mining partnerships, 68 

Minorities, inadequate represen- 
tation, 409 

Minority stockholders, protec- 
tion, 176 

Minute book, 193 

Missouri Pacific System, 316 

Money as medium of exchange, 
11 

Money capital, 12; two periods, 13 

Money paper, 80 

" Money Trust," 446 

Monopohes, coffee, 273; growth 
of Amer. Tobacco Co., 383- 
404; problem, 430; unfair com- 
petition, 427 

Morgan, J. P., 328 

Morris, Edward, estate, 315 

Morris & Co., 316 

Mortgage deed of trust, 137 

Mortgages, three types, 138 

Mountain States Telephone & 
Telegraph Co., 210 

Municipal corporations, 119 

Nagel, Charles, 258 
Napoleonic code, 19 
National Cash Register Co., 428, 

429-430 
National Cordage Co., 426 
National Harrow Co., 276 
National Lead Trust, 318 
National Starch Co., 149 
National Tobacco Works, 386, 

389 
National Wall Paper Co., 264, 

423 



National Window Glass Jobbers 
Assn., 272 

Naval Stores Pool, 270 

New England real estate trusts, 
225, 232 

New Hampshire, Business Cor- 
poration Laws, 151, 156; Dart- 
mouth College case, 112 

New Jersey, " bargain counters " 
in charters, 200; corporation 
franchise tax, 200; corporation 
laws, 162, 167, 180, 249; cor- 
poration reform of 1913, 435; 
General Corporation Law No. 
51, 204; holding-company 
charters, 203 

New York Biscuit Co., 426 

New York (City), traction sys- 
tems, 309, 335 

New York Central R. R. Co., 
securities turnover, 95 

New York Life Insurance Co., 
414 

New York Stock Exchange, reg- 
istration and transfer rule, 
195; securities annually sold in 
1912-19, 93; securities listed, 
par value and per cent of turn- 
over of certain large corpora- 
tions, 94-95 

New York Telephone Co., 
210 

Night riders, 271 

Non-Partisan League, 257 

Non-securities, 83, 84; example, 
85 

North Dakota, 257 

Northern Pacific R. R. Co., 328 

Northern Securities Co., 247, 
328; charter, 581 

Notes, short time, 141 

Obligations, onerous, 31 

Ocean transportation, control 

companies in, 345 
Offene Handelsgesellschaft, 67 
Officers, corporations, 116, 189; 



INDEX 



605 



joint stock companies, 105; 
oath, form, 531 ; responsibili- 
ties indefinite, 411 

Ohio, Stand. Oil Trust and, 321- 
322, 407 

Open-price pools, 277 

Operating trust, 232 

Option agreements, 475 

Options, form of agreement, 
476; on stock, 477; stock, 
form for, 478 

Oregon Short Line R. R. Co., 
328 

Organizations, 3 ; common law as 
basis, 22; concept of capital 
and, 8; domestic and foreign, 
22; impersonal, theory, 77; 
large scale production and 
competition, influence, 17; le- 
gal foundation, 18; personal 
and impersonal element, 77; 
personal ownership, 34; securi- 
ties-issuing, 34 

Ostensible partners, 63 

Output, curtailment, 268, 282 

Over-capitalization, 148, 413; 
prominent examples, 149; re- 
adjustment, 418 

Ownership, personal and imper- 
sonal, 34, 35; securitization of, 
97 

Ownership organizations, 16 ; 
abuses and attempts to rem- 
edy them, 407; character in 
manufacturing establishments, 
89; classification, 34; compar- 
ative qualities, 22; federal 
acts regulating, 439; federal 
laws and, 20; future policy, 
449 ; individual withdrawal 
from, 26; involuntary dissolu- 
tion, 27; legal status, 32; 
method of formation, 23; ob- 
ligations, 31 ; sphere of activ- 
ity, 33 ; state laws and, 21 ; 
voluntary dissolution, 26 

Ownership paper, 83 



Packing industry, 430; com- 
panies and interests, 343; 
Federal Trade Commission re- 
port on, 324; intermediary 
control, 312, 313, 315 

Paper. See Commercial paper 

Par value, 124, 434; of trust 
certificates, 224, 225 

Parent company, 205 

Paris Chamber of Commerce, 
261 

Participating bonds, 139 

Parti cipatio, 46 

Participation, kinds, through 
substitution of securities, 293 

Participation associations, 39, 
45; definition and nature, 
47 ;i dissolution, 50 ; legal status, 
49; limitations and uses, 50; 
management and direction, 49; 
property and liability, 48; sig- 
nificance, 51 

Participation companies, 292, 
293 

Participation control, 303, 304, 
307; instruments. 308; modes, 
310 

Partners, classification, 63; lia- 
bility for debts, 61 ; obligation 
toward third parties, 61 ; rights 
and obligation to one another, 
56; withdrawal, methods, 78; 
withdrawal of one or more, 
64 

Partnership associations, 67, 85 

Partnerships, 51, 52; agreement 
form, 461 ; alteration of agree- 
ment, 62 ; capital and property, 
59; classification and types, 
65; -contract, 53; creditor's 
satisfaction, 62; decline in im- 
portance, 71; definition, 52; 
desirable qualities, 72; direc- 
tion and management, 57; 
dissolution, 64; dissolution no- 
tice, form of, 466; extent of 
use, 70; formation, 53; forms 



606 



INDEX 



pertaining to, 461; joint ad- 
ventures, 69; legal nature and 
legal actions, 56; limitations, 
71; limited, 67; mining, 68; 
ordinary, 67; participation as- 
sociations and, 47; participa- 
tion in assets, profits and 
losses, 59; sphere of activity, 
64; termination, 64; time of 
beginning, 55; trading and 
non-trading, 66 ; underwriting 
syndicates, 69; universal, gen- 
eral or special, 66; unlawful 
enterprises, 54; withdrawal of 
partner, form of notice, 466 

Patent medicines, 273, 284 

Patent pools, 276 

Patents, 146 

Pennsylvania R. R. Co., 124, 
203; stock certificate form, 
489, 490 

Pennsylvania System, 203 

Perpetuities, rule against, 227 

Personal control, elimination, 
97 

Personal ownership organiza- 
tions, 34; types, 39 

Peruzzi, 46 

Petroleum finance companies, 
European, 376 

Pfingst, Doerhoefer & Co., 385 

Pierce-Fordyce Oil Assn., 102; 
articles of co-partnership, 467 

Pig iron, 248 ; German Syndicate, 
283 

Plug tobacco war, 388 

Plumb Plan, 441 

Pools, 254, 265; agreement, typi- 
cal form, 557; American his- 
tory, 265-266 ; central purchase 
of total supply, 272; central- 
ized or joint sales plan, 270; 
classes and methods, 266; cur- 
tailment of output, 268; open- 
price, 277; patent, 276; per- 
centage division of business, 
266; price fixing, 273; railroad 



freight rates, 275; stock, 175; 
territorial division of market, 
269 
Portland Cement Assn., 278 
Powder manufacturers, 269, 345 
Powder Trust, 428 
Powell, Smith & Co., 394 
Preferential arrangements, 262, 

264, 429 
Preferred stock, 131; charter 
clause, forms, 486; cumula- 
tive, 133; English special kind 
135; of no par value, 134 
preference as to assets, 133 
preference as to dividends 
132; redeemable, 134; repre- 
sentative types, 486; voting 
power, 133 
Pre-incorporation agreement, 152 
President of corporation, 190 
Price control agreements, 254 
Price cutters, 275, 277 
Price cutting, local, 428 
Price-fixing pools, 273 
Price reduction, 242 
Private property, 5, 39 
Privileges, rights and, 6 
Production, large-scale, 17, 238, 
239; restriction in German 
kartells, 282 
Professions, corporations in, 199 
Profit sharing, 43 
Profit-sharing bonds, 140 
Promoters, 243, 250, 251 ; profits, 

416; regulation, 450 
Promotions, abuses, 411; four 

steps, 356; unwise, 412 
Promptness of action, 30, 42 
Property dividends, 187 
Proprietary companies, 294 
Proprietary Drug Pool, 273 
Proprietorship, individual, 39; 
See also Individual proprietor- 
ship 
Proxy, 129, 528; abuse of privi- 
lege, 410; general and unlim- 
ited, form, 528; revocation of 



INDEX 



COT 



proxy, form, 528; voting by, 
174 
Public, attitude and interests, 

452 
Public utilities, control corpora- 
tions among, 335 
Pujo Commission, 407, 415, 446 
Purchase-money bonds, 138 
Pj^ramided control, 308; Atlan- 
tic Coast Line, 313, 314; Rock 
Island System, 313, 314 

Quasi-corporations, 68 

Queen and Crescent Route, in- 
tercorporate relations, 333, 334 
(diagram) 

Quorum at stockholders' meet- 
ings, 171 

Railroad equipment companies, 
close interrelation with banks 
and railroads (chart), opp. 416 

Railroad Wage Board, 441 

Railroads, capitalization in the 
United States, 147, 148; close 
interrelation with financial and 
railroad equipment companies 
(chart), opp. 416; consoUda- 
tion plan, 441 ; contract con- 
trol, 305; control companies, 
327; freight rate pools, 275; 
Germany, financing companies, 
374; investment holdings, 299; 
joint control, 311; Transporta- 
tion Act of 1920, 440 

Rates. See Freight rates 

Reading Co., 308 

Real estate trusts, 225, 232 

Rebates, 264, 429 

Record Stockman Publishing Co., 
315 

Redeemable preferred stock, 134 

Reform, 432; Systematic, 434 

Registrar of stock, 170, 195 

Regressive voting, 174 

Regulation, 432 ; of corporations, 
122; state, 432 



Reorganizations, 418, 420; cor- 
porations, 117; over-capitaliza- 
tion and, 149 
Reports, 31, 32; corporations, 118 
Representative government of 

corporations, 196 
Republic Iron and Steel Co., 249 
Responsible management, 433 
Restraining contracts, 429 
Restraint of trade, 247, 322, 430 
Retail stores companies, 347 
Retailing, 44 
Rhode Island corporation law, 

180 
Rice as medium of exchange, 11 
Rights, 146; privileges and, 6 
Rigidity of investments, 79 
Riker & Hegeman Co., 352 
Ripley, W. Z., 268 
Risk, 12 

Rock Island Co., 308, 417 
Rock Island Sj'stem, pryamided 

control, 313, 314 
Ruhr coal mines, 72 
Ryan, A. A., 426 

St. Lawrence Securities Co., 368 
Salt producers' pool, 270 
Scotten (Daniel) & Co., 389 
Scrip dividends, 187,. 423 
Sears, J. H., 227; directions for 

trust agreements, 230 
Secrecy, 29; participation asso- 
ciations, 47, 49, 50 
Secret partners, 63 
Secretary' of corporation, 192 
Securities, 14, 83, 84, 85; as capi- 
tal, 16; as commercial paper, 
80; classes ordinarily used, 
142; extent of use, 86; general, 
124; inflation, 146; liquidity, 
93; nature, 77; new issues in 
the U. S. in 1913-20, 91; re- 
cent progress in issuance, 90; 
statistics of issues by countries 
in 1909-11, 87; transferability, 
92 



608 



INDEX 



Securities-assumption companies, 
358, 360 

Securities-combinations, 254 

Securities-holding corporations, 
202; charter of Northern Se- 
curities Co, 581 ; laws as to, 
203, 204; prominent examples 
and dates of formation, 203 

Securities-holding principle, 204 

Securities-issuing organizations, 
34; forms pertaining to, 467; 
types, 98 

Securities-issuing trust, 99 

Securities-substitution, 205, 208, 
290 

Securities-substitution companies, 
16, 254 

Securitization, 204, 294; prin- 
ciple of, 97 

Serial payment of bonds, 139, 
140 

Settlors, 214 

" Seven Sisters," 435 

Shareholders, joint stock compa- 
nies, 104; resolution authoriz- 
ing consolidation, form, 573; 
see also Stockholders 

Sherman Anti-Trust Act of 1890, 
245, 262, 266, 278, 322, 407; 
description, 442; text of the 
act, 586 

Sherwin-Williams Co. of Canada, 
486 

Shingles, 268 

Shoe industry, 246 

Short time notes, 141 

Shredded Wheat Co., 430 

Signatures, corporate, forms, 536, 
537 

Silent partners, 29, 63 

Simple corporation, 201, 202 

Sinking fund, 139 

Sleeping partners, 63 

Smelters' Securities Co., 366 

Snuff business, 392 

Social custom, 5 

Social revolution, 27 



Societa per azioni, 100 

Societe anonyme par actions, 100 

Societe en commandite, 67 

Societe en nom collectix, 67 

Societe en participation, 47 

Sorg (P. J.) Co., 388 

South Africa, mining finance 
companies, 376; mining indus- 
try, 252 

Southern Pacific Co., 328, 332; 
leasehold control, 306 

Southern Pacific R. R., kinds of 
outstanding securities, 142 

Southern Pacific System, 332 

Southern Railway Co., 310 

Special finance and assumption 
companies, 358, 359 

Special mortgage bond, 138 

Special partners, 63 

Specialists, 43 

Specialization, 30 

Speculation, 50, 96, 251, 423; life 
insurance companies, 414; 
three kinds, 425 

Speculators, classes, 424 

Sphere of activity, 33 

Stability, 25 

Standard Envelope Co., 429 

Standard Oil Companies in 
states, 320 

Standard Oil Co. of New Jersey, 
description of control organ- 
ization, 339 

Standard Oil Trust, 176, 206, 211, 
216, 229, 234; agreement of 
1882, 318, 319 (diagram); 
agreement with supplemental 
agreement of 1882, 560; con- 
ception, 318; large fine for re- 
bates, 429; local price cutting, 
428; Ohio state attack on, 
321-322, 407; preferential ar- 
rangements, 264 

State control, 453 

States, limited liability organiza- 
tions and, 32; regulation of 
business, 20, 21 



INDEX 



609 



Status, legal, 32 

Statute law, 18 

Steel Erectors' Assn., 278 

Steel industry, Gary dinners for 
price fixing, 278; necessity of 
capacity production, 239 ; 
pools, 267; See also U. S. Steel 
Corporation 

Steel Rail Pool of 1887, 267; 
form of agreement, 557 

Stephenson, C. F., 317 

Stevens, W. H. S., 262; on ex- 
clusive arrangements, 263; on 
unfair competition, 428 

Stinnes, Hugo, 253, 285 

Stock certificate book, 193, 194 

Stock certificates, 126; bond of 
indemnity for reissue of lost, 
form, 495 ; common stock with- 
out par or nominal value, 
form, 494; common stock giv- 
ing terms of preferred issue, 
form, 493; forms, 488; lost, 
form of notice of stoppage of 
transfer, 495 

Stock dividends, 90, 186; income 
taxes and, 187 

Stock exchanges, 92 

Stock ledger and transfer book, 
193, 194 

Stock pools, 175 

Stock transfer, 439 

Stockholders, 167; chart showing 
distribution in the United 
States, 168; classification, 169; 
common, rights, 129; fluctua- 
tion in personnel and numbers, 
167; in corporations, 115; in 
corporations, liability, 130; ir- 
responsibility, 410, meetings 
for organization, 155 ; minority, 
protection, 177; of record, 170; 
powers as a body, 168; pro- 
tection, 451; protection af- 
forded by by-laws, 164; quali- 
fication, 169; sale of assets, 
form of resolution, 538; trans- 



fer book, 194; voting trusts, 
175 

Stockholders' meetings, 171, 522; 
call and waiver for first meet- 
ing, form, 523; notice of regu- 
lar or annual meeting, form, 
524; officers and quorum, 171; 
president's call, form, 525; 
special, 525; special meeting 
by call and waiver, form, 527; 
stockholders' request for spe- 
cial meeting, form, 526; voting 
methods, 172 

Stocks, 13, 14, 83, 86, 124 
brokers', 96; classification, 128 
common and preferred, 128 
case of transfer, 409; full-paid 
and part-paid, 126; issued and 
unissued, 125; manipulation, 
414; option on, 477; option, 
form for, 478; percentage of 
turnover, 167; preferred, char- 
ter clause, forms, 486; pre- 
ferred representative forms, 
486; real value of shares, 125; 
registrar, 170; transfer agent, 
170; treasury stock, 127; 
watered, 127, 145, 186, 413 

Stogie business, 396 

Straight ballot, 172 

Structural Steel Assn. of 1897, 
267 

Stutz Motors Corporation, 424, 
426 

Subdivision of legal title, 205 

Sub-partnerships, 68 

Subscription lists, 193, 194, 478 

Subsidiary company, 205; abuse 
oi the principle, 207 

Substitution of securities, 205, 
208, 290 

Sugar industrv, financing, 309, 
366 

Sugar Refineries Co., 318 

Sugar Trust, 318; attack on, 321 

Supph^, pools for handling total, 
272"' 



610 



INDEX 



Supply and demand, maladjust- 
ments, 238 
Supporting the market, 414 
Surplus, undivided profit and, 

422 
Swift, Edward F., 317 
Swift & Co, 315, 316, 317 
Switzerland, combinations, 253; 

finance companies, 378 
Syndicates, 254, 265, 278; under- 
writing, 69 

Taft, W. H, 258; on trusts, 455 

Taxes, 31, 32; corporations, 118; 
trusts, 228 

Teilhaberschaft, 72, 85 

Telephone, 146 

Telephone combination, 247 

Telephone companies, 335 

Tenth amendment, 19 

Territorial division of market, 
269 

Textile AlHance Export Assn, 
271 

Thyssen, August, 253 

Tin Plate Assn, of 1900, 267 

Tinfoil business, 394 

Title. See Legal title 

Tobacco as medium of ex- 
change, 11 

Tobacco industry, English com- 
panies, 397; growth of Amer. 
Tobacco Co, 383-404; inter- 
national agreement, 269; pro- 
tective pool, 271 

Tobacco Trust, dissolution, 402; 
organization (chart), 401 

Total Supply, 272 

Trade associations, 259 

Trade combinations, 245 

Trade Gilds, 256 

Trade unions, 7 

Trading monopolies, 107 

Transfer book, sto,ckholders', 194 

Transferability of securities, 92 

Transfers of stock, 170, 439; 
abuse, 409 



Trans-Missouri Freight Assn., 
275-276 

Transportation, economic growth, 
9 

Transportation Act of 1920, 440 

Treasurer, bond, form, 532; of 
corporation, 191; dividend no- 
tice, form, 534 

Treasury stock, 127 

Trust agreement, 214; directions 
as to what it should contain, 
230 

Trust certificates, 221, 224 

Trust companies, 358; finance 
operations as cause of failures, 
358 

Trust estate, 213 

Trust on shares, 99 

Trust shares, 83, 86, 224 

Trustees, 213, 214, 215; as man- 
agers, 215; compensation, 220; 
control through, 313; in joint 
stock companies, 105; liability, 
217; number, appointment, 
216; removal and successors, 
217 ; stockholders' voting 
trusts, 175; subscription list, 
form, 479 

Trusts, agreement and declara- 
tion of trust of the Mass. Gas 
Companies, 540; as control 
companies, 318 ; beneficiaries, 
220; capital, 224; combination 
trusts, 176, 232, 233; court of 
equity and, 220, 228; creditors' 
rights, 226; definition, 213; 
dissolution, 228 ; duration, 227 ; 
formation, 214; good and bad, 
430-431; holding trusts, 232, 
233; investment trusts, 232, 
234; kinds — active and sim- 
ple, 213; legal status, 321; 
legislation against, 322 ; miscel- 
laneous features, 227; operat- 
ing trusts, 232; present-day, 
322; President Taft on, 455; 
right to sue and be sued, 219; 



INDEX 



611 



scope of activity, 228; struc- 
tural elements, 214; taxation, 
228; three types, 232; uses 
and advantages, 229; voting, 
status, 175; Wilson Tariff Act 
of 1894 and, 443 
Tying contracts, 254 

Underwriting, profits, 415 

Underwriting syndicates, 48, 69, 
357, 379; See also Finance and 
assumption companies 

Undivided profits, 422 

"Uneeda," 146 

Uniform Stock Transfer Act, 439 

Union Pacific R. R. Co., 299, 328, 
332 

Union Pacific-Southern Pacific 
System, 330 

United Cigar Stores Co., 348, 352, 
396, 397; securities turnover, 
9,5 

Uiiited Coal Tar Refining Co., 
269-270 

United Drug Co., 248, 348, 352 

United Paperboard Co., 487 

United Retail Stores Corpora- 
tion, 135, 248, 348 

United Shoe Machinery Co., 246; 
exclusive arrangements, 264 

U. S. Envelope Co., 487 

U. S. Finishing Co., 422 

U. S. Leather Co., 96, 170, 210- 
211, 419-420, 425 

U. S. Realty Co., 421 

U. S. Realty & Construction Co., 
149 

U. S. Rubber Co., 425; securi- 
ties-turnover, 95; underwriting 
profits, 415 

U. S. Shipbuilding Co., 123, 149, 
309, 353 

U. S. Steel Corporation, 126, 184, 
186, 203, 251 ; amended certifi- 
cate of incorporation, 573; 
bond conversion plan of 1902, 
419; brokers' and investors' 



stock, 96 ; by-laws (as standard 
form), 503-518; description of 
control organization, 341 ; 
dummy incorporation, 157; ex- 
port association, 272; financial 
policy, 417; financing a sub- 
sidiary, 359; Indiana Steel 
Co. and, 206; intermediary 
control, 312, 313; kinds of 
outstanding securities, 142 ; 
mergers and amalgamation of 
subsidiaries, 338; number of 
common stockholders, 167; or- 
ganization as of 1919 (chart), 
344 ; over-capitalization, 148, 
149 ; securities-turnover, 95 ; 
stock certificate form, 491, 492; 
subsidiaries, 206 ; subsidiary 
incorporation, 338; suit against, 
249; underwriters' bonus, 415 

Universal Portland Cement Co., 
206 

Untermyer, Samuel, on corpora- 
tion laws, 431 

Upper Silesian Coal Syndicate, 
281 

Usury, 12 

Valorization, 272, 273 

Vertical combination, 244, 245, 
248 

Vice-president of corporation, 
191 

Voting, by proxy, 174; stock- 
holders' meetings, 172 

Voting control, 303, 308 

Voting trustees' certificate, form, 
521 

Voting trusts, 233, 304, 309; 
form of agreement, 519; stock- 
holders, 175 

Waltham Watch Co., 428 

Wampum, 11 

War Finance Corporation Act, 

448 
W^ash sales, 415, 430 



612 



INDEX 



Washington Branch Road, 203 
Washington Red-Cedar Shingle 

Assn., 268 
Watered stock, 127, 145, 186, 413 
W^ebb Act of 1918, 271; provi- 
sions, 447 
West India Sugar Finance Cor- 
poration, 309, 366 
Western Electric Co., 337 
Western Export Assn., 268 
Western Telephone & Telegraph 

Co., 337 
Western Union Telegraph Co., 

337 
WestinghoUse Mfg. Co., 361 
Westinghouse Electric and Mfg. 
Co., 417 



Westphalian Coal Syndicate, 284 

Weyman-Burton Co., 487 

Whiskey, 268 

Whiskey Trust, 318, 321, 426 

Whitlock, PhiHp, 386 

Wilson, Woodrow, on New Jer- 
sey corporation laws, 435 

Wilson Tariff Act of 1894, 443 

Wind River Refining Co., 125 

Window glass pool, 272 

Withdrawal from partnerships, 
methods, 77 

Wright (John) Co./ 389 

" Wrigley's," 146 

Yellow Pine Assn., 278 



